Posts Tagged ‘Robert Goulder’

Tax Roundup, 10/24/14: IRS attorney says revolving door spins away billions. And: pass-through isn’t always small.

Friday, October 24th, 2014 by Joe Kristan

20130129-1Taxes are for the little people without connections. A sensational open letter to the top Treasury tax brass from an IRS attorney alleges that the agency routinely shuts off promising examinations of big well-connected taxpayers. From Raw Story (via the TaxProf):

In a letter to Treasury Secretary Jacob Lew, IRS commissioner John A. Koskinen, and IRS chief counsel William Wilkins, Jane J. Kim, an attorney in the IRS Office of the Chief Counsel in New York, accused IRS executives of “deliberately” facilitating multi-billion dollar tax giveaways. The letter, dated October 19, will add further pressure on the agency, which is under fire for allegedly targeting conservative and Tea Party groups.

The letter describes three cases where Ms. Kim says the IRS walked away from large well-founded assessments of big corporate taxpayers raised by whistleblowers. The story implicates the revolving door between big law and accounting firms and the top levels of the IRS as a key to the strange taxpayer friendliness.

Bill Henck, who has worked for over 26 years in the IRS Office of the Chief Counsel, agreed. “The senior executives drive the train on all this and pal around with lobbyists,” he said. “Treasury was involved with both the Elmer’s Glue scam and the black liquor taxability issue. IRS executives look out for themselves, which usually means protecting corporate interests, since they hire lobbyists and are close to politicians.”

Backing up Henck’s concerns, the private sector lawyer and ex-IRS attorney explained that since 1998, IRS restructuring has focused on bringing in “outside people.” This led to the employment of an extra layer of executives who were previously “partners from big accounting firms.” Citing active IRS criminal agents, the ex-IRS attorney said: “Almost every large firm or corporation has a person inside the IRS. It’s a revolving door, with the top two or three management layers all from big accounting and law firms, and this is why they won’t work big billion-dollar cases criminally. Private bar attorneys are, in effect, controlling the IRS. It’s a type of corruption – that’s the word used by one IRS agent I’m in touch with whose case was shut down by higher ups without cause.”

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

That brings to mind Commissioner Koskinen’s view of the revolving door:

So I’ve always said the best testimonial to a good place to work is people are forever coming in and trying to steal your people. And so I would be delighted to have young people come here for two or three years and some of them get recruited away because they were so good and the training is so good, because the more of that that happens, the more people are going to stand in line to get here. And as I say, the experience is, because it would be a great place to work, is the capture rate would be terrific.

So the Commissioner thinks the revolving door is a good thing. That probably means Ms. Kim’s letter isn’t exactly going to trigger reforming zeal from Mr. Koskinen. And don’t expect that you can skip out on taxes without your own mole in the IRS, chump.

 

 

Robert D. Flach has your fresh Friday Buzz! Including depressing news that Congresscritters are going to wait until January 2015 to enact the tax laws for 2014.

Kay Bell, Some retirement plan contribution, AGI limits go up in 2015

Brett Bloom, Dismantling a Partnership: The IRS’s Toolbox (Tax Litigation Survey)

William Perez, How to Plan for, Minimize, and Report the Self-Employment Tax

TaxGrrrl, IRS Gets Big Win In Court As Judge Dismisses Tea Party Targeting Cases

Peter Reilly, National Organization For Marriage – No Recovery Of Attorney Fees In Case Against IRS

TaxProf, The IRS Scandal, Day 533

 

Kyle PomerleauPass-Through Businesses are not Always Small Businesses (Tax Policy Blog). This article is a good read for anyone who thinks increases in top rates don’t hurt business because most pass-throughs are small. While that may be true, there a lots of large ones:

Compared to c corporations, pass-through businesses are still much smaller on average. The same Census data shows that 1.6 percent of corporate businesses employ 100 or more employees and 0.36 percent employ 500 or more employees. 44 percent employ between 1 and 100 employees.

However, in absolute terms, there are about as many pass-through businesses with 500 or more employees than there are traditional c corporations. According to the Census, there are approximately 9573 pass-through businesses with 500 or more employees and 9434 c corporations with 500 or more employees.

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Source: Tax Foundation

So when you increase taxes on high-income individuals, you are also increasing taxes on employers, which isn’t likely to do good things for employment.

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Robert Goulder, FATCA Envy Spreads Across Hemisphere (Tax Analysts Blog) Other countries just might want to poke into foreign accounts the way we do.

Howard Gleckman, Why Tax Lawyers and Tax Economists Can’t Communicate (TaxVox)

 Megan McArdle,  Can’t Afford a House? Don’t Buy One. Wise advice, but politicians think we should have a program to buy a pony for everyone.

Tax Justice Blog asks What Horrors Await Us in Congress after the Election?  And will they be better or worse horrors than the current bunch of congresscritters?

 

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Tax Roundup, 10/17/14: If they don’t want the money back, it’s not a loan. And: the state of your IRS “rights.”

Friday, October 17th, 2014 by Joe Kristan

20120511-2Loans aren’t income. But income isn’t loans either. A Tennessee woman struggled with the difference, but the Tax Court straightened her out yesterday.

The taxpayer did consulting work for the medical practice of a Dr. Quisling. Somehow linked to this, she got payments over an eight-year period from around $25,000 to $56,000 annually.  She didn’t file tax returns for any of these years.

The taxpayer took a strange approach to the payments. We’ll let Judge Kerrigan explain (my emphasis):

Petitioner sent Dr. Quisling a memorandum entitled “Memorandum of Understanding on Loan Terms and Conditions”. This memorandum states:

    It has been revealed to me that the action of Blue Cross Blue Shield of Tennessee, Inc., * * * has created a financial burden upon your medical practice, because the medical services rendered by your medical practice rely upon payment(s) received by BCBST. Therefore, I am willing to develop a loan package * * * for the short-range and long-range impact upon the delivery of medical services by the “in-network-provider” as well as the “out-of-network provider” * * *.

The memorandum further states “[a] reasonable expectation of this Memorandum of Understanding on Loan Terms and Conditions is that the loan proceedings will be based upon a) your ability to loan and b) the completion of the research which will result in profit to the undersigned in order that the loan can be repaid.”

This memorandum, dated April 1, 2003, includes the signature of petitioner but not the signature of Dr. Quisling. Petitioner sent Dr. Quisling a followup letter to the memorandum requesting a memorandum of acceptance. The memorandum of acceptance includes a signature alleged to be Dr. Quisling’s, but this signature is not his.

20120801-2See, loans aren’t income, so we don’t have to tell IRS! But Judge Kerrigan notes a flaw in this cunning plan:

Petitioner did not make payments to Dr. Quisling. Neither Dr. Quisling nor Mrs. Quisling demanded payment from petitioner.

Yes, repayment is a key part of a loan agreement. You give me money, I give it back later. Without the second part, it’s either a “gift” or “income.”

The doctor wisely did not play along, but unwisely failed to issue 1099s.. The doctor terminated the consulting relationship in 2011 when she refused belated requests for her Social Security number.

The taxpayer denied performing services. She said the money was given her for other things:

Petitioner contends that payments made by Quisling were loans. Petitioner testified that she needed the money to fund the research for a book that she was writing. However, petitioner produced no evidence of the book including the potential for publishing the book or any other evidence of her ability to repay. Dr. Quisling testified that the payments were not loans and that he did not expect to be repaid.

On February 5, 2011, petitioner faxed Dr. Quisling a letter referencing an alleged purchase of medical equipment that Quisling made from petitioner’s deceased husband. On February 25, 2011, Dr. Quisling’s attorney and the attorney for Quisling, Vincent Zuccaro, sent petitioner a letter stating that Quisling had not purchased any equipment from her husband or received a gift of property from her or her husband.

The Tax Court had little trouble finding that the taxpayer received income, rather than loans, upholding the tax assessment and various penalties.

The Moral? If you get income, calling it a “loan” doesn’t make it one. Especially when the “lender” doesn’t think it’s a loan and never asks for repayment.

Cite: Fisher, T.C. Memo 2014-219.

 

20130419-1Amber Athey, Is the IRS Upholding Your Taxpayer Rights? (Tax Policy Blog). Some better than others:

2. The Right to Quality Service:

While the opportunities for outreach seem robust, in 2012, only 66 percent of taxpayers trying to call the IRS reached a representative, and callers waited on average of 17 minutes, up from 12 minutes in 2011. An article from April of 2014 stated the wait time was up to 30 minutes, largely due to budget cuts.

And:

8. The Right to Confidentiality

Any information disclosed to the IRS may not be shared with anyone else unless authorized by the taxpayer or by law. The IRS struggles with protecting the confidentiality of taxpayers. Numerous information scandals have plagued the IRS, including the posting of 100,000 names and social security numbers on their website and an unencrypted thumb drive loaded with social security numbers being taken home by an employee.

In the first six months of 2013, 1.6 million taxpayers were affected by identity theft, compared to 271,000 in 2010. Thefts have resulted in billions of dollars in potentially fraudulent refunds, as the IRS issues refunds before they’re sure the filing was done by the person whose name is on the form. In 2011, fraudulent refunds totaled $3.6 billion.  Serious improvements in security measures need to occur in order for taxpayers to feel confident that the IRS can protect their information.

But Amber Athey still thinks the IRS “Taxpayer Bill of Rights” is a good thing:

The IRS has room to improve in protecting the rights of taxpayers, but the implementation of the Taxpayer Bill of Rights is a great first step in this process. A clear outline of rights is also highly beneficial to the IRS and taxpayers as a means setting expectations for the function of the IRS.

I suppose having something to aspire to is a good thing, but it would be a lot better if there was somebody who would actually enforce these rights and impose costs on the IRS for falling short.

 

buzz20141017buzz20141017Robert D. Flach has a friday “Buzz Light,” linking to tax things.

Jason Dinesen, Updated Wisconsin Tax Guidance for Same-Sex Married Couples

Kay Bell, Are you willing to pay more to cover Airbnb taxes?

Paul Neiffer invites you to an Ag Summit in Chicago on December 7 with Andy Biebl and Lance Woodbury on “Farm Retirement and Transition Planning.”

 

Kyle Pomerleau, The Pease Limitation on Itemized Deductions Is Really a Surtax (Tax Policy Blog). It’s also a lie. It works like a rate increase, but more complicated and without the honesty.

Howard Gleckman, Taxes and Spending Return To “Normal”– But Not For Long (TaxVox)

Robert Goulder, Early Results Are In: Inversions Aren’t Going Away (Tax Analysts Blog) “It’s too early to draw a definitive conclusion here, but it seems the world’s multinationals haven’t yet thrown in the towel on inverting to low-tax jurisdictions.”

Richard Phillips, Ireland’s Soft Pedaling Tax Avoidance Crack Down (Tax Justice Blog)

TaxProf, The IRS Scandal, Day 526

Me, IRS Issues Applicable Federal Rates (AFR) for November 2014

Career Corner. A Quick and Dirty Guide to Getting Away With Insider Trading (Leona May, Going Concern)

 

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Tax Roundup, 3/11/2013: Five weeks left edition. And Accumulated Earnings Tax agitation.

Monday, March 11th, 2013 by Joe Kristan

20130311-1The 1040 filing deadline is five weeks from today.  The 1120 and 1120S deadline is this Friday.  The penalty for filing an 1120-S late is $195 per shareholder, with the penalty repeated each additional month the return is late.  Proceed accordingly.

 

A Des Moines tax lawyer lets us know what we are in for:  Just a Little Bit More? Yeah Right. Get Ready to Pay More Taxes in 2013 (William Brown).  He illustrates what will happen to one of his clients, “Fred,” when he pays his 2013 taxes:

Fred’s federal taxes have increased by 9% with no change in his earnings.  If Fred does not increase his distributions from his business to pay these increased taxes, his disposable income will decrease by 19%.  Might these increased taxes have no substantial impact on the prospects of his small business and its employees?  Not a chance.

Read the whole thing.  Related:  Phil, we have altered the deal.  Pray we don’t alter it further.

 

David Cay Johnston pushes for harsher accumulated earnings tax.  As I predicted, we’re starting to see people pushing for enforcement of the Accumulated Earnings Tax to deal with the pretend problem of corporations “hoarding” cash.  Mr Johnston takes the podium in an (unfortunately gated) article in Tax Notes:

     American nonfinancial corporations held more than $2.2 trillion of cash and near cash offshore at the end of 2010 in current dollars, IRS and Federal Reserve data shows. And that is on top of the almost $1.7 trillion of liquid assets owned by firms and subsidiaries with U.S. addresses that we will see when the 2012 corporate income tax data becomes available in a few years. That global cash and near cash pile of almost $4 trillion came to $12,600 per American — well more than triple the $3,500 in per capita federal income tax revenues that year.

     There is no possible business justification for that much cash. As Tax Court Judge David Laro wrote in Haffner’s Service Stations Inc. v. Commissioner, T.C. Memo. 2002-38  “a need to retain earnings must be directly connected with the needs of the corporation itself and must be for bona fide business purposes.”

No “possible” business justification for that much cash?  It’s pretty easy to come up with potential justifications.  If you are a corporation sitting on a lot of cash, you have a lot to think about.   You have unusual opportunities, which you need to evaluate carefully.  The imposition of the shareholder-level tax on earnings is certainly a factor.  Does that mean I trust corporate management and boards?  No.  But I trust them a lot more than second-guessers at the IRS.

The Judge Laro cite that Mr. Johnston uses only restates the legal background of the accumulated earnings tax — not the economics of it.

If you want to really encourage corporations to free up their cash, end the double-taxation of corporate income by allowing full deductibility of dividend payments — with an excise withholding tax on non-profit and non-U.S. distributees to ensure the income is taxed once.  That will give corporations a powerful incentive to distribute cash they aren’t using — one that will work a lot better than beefing up the IRS Second-Guess Division.

Update: Mr. Johnston e-mails:

            I have written in favoring of restoring tax-free dividends for modest sums or encourage savings, partly because most Americans have little saved in the tax system and even though only one in four gets dividends directly: [$link Ed.]

And I called for a two-year test of dividend deductions in this column a few months later, arguing that dividends have the virtue of separating actual value-added managers from those who play accounting games since you need need cash to make dividend payouts. [gated links here and here. Ed.].

Unfortunately I don’t have links to free versions of the original articles.

Related: Garett Jones,  Redistributing from Capitalists to Workers: An Impossibility Theorem, on why the economically-optimal rate of tax on capital is zero. (Econlog)

 

 

No more paper Internal Revenue Bulletins.  The IRS has discontinued its old paper Internal Revenue Bulletin, where it published tax guidance.  From Announcement 2013-12:

The IRB is available on IRS.gov before printed copies are available. Also, the majority of items (about two-thirds) that appear in the IRB are released with a News Release about a month ahead of when the item appears in the IRB. Since all items in the IRB are available electronically, almost a month in advance of being available in the printed IRB, we are eliminating the printing of paper copies of the IRB, which are distributed directly from the IRS. The cost savings to printing and postage would be $148,000 annually.

It makes sense.  Another bit of my accumulated tax training goes the way of the Dodo.

 

Russ Fox,  If You’re a Sole Proprietor, Get an EIN…Now!.  Otherwise it’s too easy to get your identity stolen.

William Perez,  Minnesota Revenue Department Finds “Unacceptable” Errors in TurboTax.

TaxGrrrl, IRS Explains Delays In Processing Some Returns Claiming Education Credits

Kay Bell,  Federal workers owe $3.5 billion in back taxes; Expect renewal of legislative efforts to fire federally-employed tax debtors.  Some people don’t buy the “better to give than to receive” thing.

Brian Mahany,  IRS Begins Rejecting OVDI Filings – Important News For Fence Sitters

Jack Townsend,  Bank Leumi U.S. Clients Rejected from OVDP

Robert Goulder: Taxation & Morality: Odd Bedfellows (Tax.com)

 

Peter Reilly,  Render Unto Caesar – Mormon Tithe Not A Necessary Expense In IRS Collection Case

Patrick Temple-West,  Tax haven hunter Levin to retire, and more

 

The Critical Question: Who Are Your Tax Policy Friends? (Jim Maule)

Going Concern,  No, We Can’t Help You Pass the Ethics Exam.  When I took it, it was mailed to successful CPA candidates to do at home and mail in.  No wonder there are no ethical problems with our generation.  Oh, wait…

 

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Tax Roundup, 3/4/2013: Eight years for tax shelter lawyer. Plus: employee tax fraud, employer tax bill.

Monday, March 4th, 2013 by Joe Kristan

20130304-1A federal judge Friday sentenced a key player in the once-lucrative Jenkens & Gilchrist tax shelter practice to eight years in prison.  From the AP:

U.S. District Judge William H. Pauley III sentenced 52-year-old Donna Guerin, of Scottsdale, Ariz., after she pleaded guilty to conspiracy to defraud the United States and tax evasion. He ordered her to pay $190 million in restitution besides the $1.6 million she agreed to forfeit when she pleaded guilty in September.             

Guerin, a former partner at Jenkens & Gilchrist, a Texas-based law firm with offices throughout the United States, had admitted that she helped market tax shelters from 1994 through 2004 to some of the world’s richest investors, including the late sports entrepreneur Lamar Hunt, trust fund recipients, investors, a grandson of the late industrialist Armand Hammer and one of the earliest investors in Microsoft Corp.

The biggest prosecution target at Jenkens, Paul Daugerdas, faces his second trial on the charges in September.  His 2011 trial was voided because of juror misconduct.

Jenkens was one of the big players in the tax shelter industry that sprung up among big law and accounting firms in the 1990s.  It shut down in 2007 after entering a non-prosecution agreement with the Justice Department.

Sort of related:  Ernst & Young Admits That Some of Its Partners Were Running a Tax Shelter Factory (Going Concern);  Ernst & Young Pays $123 Million, Avoids Tax Shelter Prosecution (Janet Novack)

 

Robert Goulder, Questioning the Longevity of the Income Tax (Tax.com):

Dare we attempt to guess what the income tax might look like in another 100 years? 

Personally I think it will still exist, but it will have company. The big question for policymakers is whether it should operate as a “mass” tax — as it strives to do today —  or whether it will function as a “class” tax that applies only to the upper income strata. Given that roughly 47% of American households currently don’t pay the income tax (distinguished from payroll taxes, which almost everyone pays), one could argue it is already starting to resemble a class tax. Perhaps the future is already here. 

I can state with some confidence that if there is an income tax in 2113, I won’t be preparing returns.

 

Jack Townsend,  Fraud on the Return — Even If Not the Taxpayer’s — Causes an Unlimited Civil Assessment Statute of Limitations to Apply.  This is an ugly result caused by an in-house accountant who stole funds meant for payroll taxes.  The Second Circuit overturned the Tax Court and held that the employee’s fraud meant that the employer’s statute of limitations never closed for tax assessment purposes.

 

Russ Fox has a helpful tip: A Sure-Fire Way to Get Indicted

There are many ways to get in trouble with tax law.  As I have said in the past, if you want to get indicted it’s a bit harder.  It helps to be a celebrity, have a very large tax debt, not report large amounts of funds in foreign financial accounts, or abscond with trust fund taxes.  I need to add another item to that list: File liens against IRS employees  who are investigating you.

For some reason, they respond badly to that.

 

William McBride,  BEA: Personal Income Drops 3.6 Percent in January, the Most since the Clinton Tax Increase of 1993  (Tax Policy Blog).  It wouldn’t be shocking if a lot of folks moved income up to 2012 to avoid the 2013 tax increases.

Kay Bell, Don’t forget about your traditional or Roth 401(k)

Paul Neiffer,  When an UPREIT Might Make Sense

Trish McIntire,  Catching Up On the News, a rundown of issues practitioners are running into during filing season.

TaxGrrrl,  If You Qualify, File Your Taxes For Free

Tony Nitti,  Competing Senate Bills Fail; Sequestration Is Here (For Now)

Howard Gleckman,Sequester, We Hardly Knew Ye (TaxVox)

Kaye Thomas,  The Mindbending World of Wash Sale Calculations.

David Cay Johnston, Good News for Investors and Taxpayers (Tax.com)

Martin Sullivan, Red Hot REITs Fire-up Low Tech (Tax.com)

 

Peter Reilly,  Time To Eliminate Joint Filing ? No, it’s not actually related to the next article.

News you can use.  Leff: Medical Marijuana Providers Can Beat Oppressive Federal Taxes by Operating as Non-Profits (TaxProf)

 

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Tax Roundup, 2/22/2013: Why California refugees might not choose Iowa. And: to C or not to C?

Friday, February 22nd, 2013 by Joe Kristan

 

Enjoying a short Des Moines winter commute.

Enjoying a short winter commute in bicycle-friendly Des Moines.

We aren’t scaring them.  Governor Branstad is making a trip to California to poach some businesses from the failing Golden State.  He’s not scaring one Californian:

Iowa’s top state personal income tax rate is 8.98 percent, compared to 13.3 percent in California. Probably not enough of an improvement to lure millionaires from Pacific Palisades to Dubuque. By contrast, Texas offers zero percent.

The top state corporate income tax rate is 12.5 percent in Iowa, 8.84 percent in California and zero percent in Texas.

Earlier this year, Branstad said he would no longer pursue getting rid of Iowa’s corporate and personal income taxes. Instead, he’s going to focus on cutting property taxes.

Well, California’s property taxes already are fairly low thanks to Proposition 13. Although property prices here are triple those in Iowa and most other states because of our severe restrictions on building.

Bottom line: Iowa doesn’t offer enough incentives to attract many businesses and people to leave California. The Hawkeye State is the Golden State with bad weather.

Ouch.  Well, Iowa’s solvent, too, unlike California, which is a fiscal disaster.  We also have short commutes.  Still, he makes a valid point: it’s not enough to compete with a basket case like California.  Golden State refugees have plenty of places to choose from, many of which have better taxes, better weather, or both.  I have no thoughts on fixing the weather, but The Quick and Dirty Iowa Tax Reform Plan would take care of the tax problems.  With no corporate tax and a 4% individual rate, combined with good employees, education and quality of life, we’d see some Californians.

 

To C or not to C?  The Wall Street Journal reports that taxpayers are revisiting whether to operate businesses as C corporations or pass-through entities.  C corporations face a top rate of 35%, where individuals have top rates over 42% as a result of the ill-concieved fiscal cliff and Obamacare tax increases.  From the article:

“Even though on the surface you’re looking at 35% versus 39.6%, it’s a deceptive comparison,” says Robert W. Wood, a tax lawyer with Wood LLP in San Francisco. “There may be a slight short-term advantage in C-Corporations, but there are a number of negative long-term implications that would outweigh short-term benefit.”

For example, C-Corporation profits can be double-taxed. In addition to the corporate tax on profits, owners also would owe personal taxes on any money they take out of the company as dividends. The double tax kicks in when a business is sold, too.

Another potential problem is that a firm that switches from an S-Corporation generally has to remain a C-Corporation for at least five years. 

At current rates, a switch to C corporation format is probably still unwise, if tempting, because of the double tax issue.  You might have lower tax up front, but getting the money out involves either paying a second tax on the dividends or expensive tax gymnastics, often involving renting to a corporation or potentially “excessive” compensation.  C corporations are the Roach Motels of the tax world: they’re a lot easier to check into than check out of.  But if there is a significant reduction in corporation rates, the current tax savings will be enough to tip the balance for many taxpayers to C corporation status, double tax or no.

Hat tip: TaxProf Blog.

 

When Will Tax Complexity Cause a Collapse? (Jason Dinesen). 

The tax code, as most everyone knows and acknowledges, is ridiculously complex and getting more complex all the time.

When will the complexity cause the system to collapse? And what, exactly, will collapse?

I think it would require a combination of things to “collapse” the tax law.  If the perception becomes widespread that it is impossible to comply with the tax law without unreasonable effort, or the rates get intolerably high, and technical advances allow for cash transfers and banking that the government can’t trace, then the game is over.

Tax Analysts is having a conference today on whether, after 100 years, the income tax has run its race.

Elizabeth Malm, Holy Smokes! Washington Loses $376 Million to Cigarette Tax Evasion in 2012.  Many states have raised tobacco taxes to a point where smuggling becomes attractive.

 

Howard Gleckman, Congress May Not Rewrite the Tax Code in 2013, But It Could Make It Simpler (TaxVox).  If you can’t do everything, you might still do something.

Kay Bell, Education tax credit form, already pushed into February, now causing filer confusion and more delays in processing

Peter Reilly,  Bill Romanowski’s Tax Court Loss Not A Typical Horse Case.  We covered it here yesterday.

TaxGrrrl, About Those Leaked Wal-Mart Emails… Is IRS To Blame For Sluggish Sales?  Are tax refund delays stopping consumer spending?

Teaching by bad example, Nebraska-style.  I examine the tax troubles of a prairie-town lawyer.

 

Jim Maule, How Tax Falsehoods Get Fertilized.  That “70,000-page tax code” really bugs him.

Want to raise the minimum wage?  Then apply it to your interns, Congresscritters. (Donald Boudreaux).

Don’t bug Robert D. Flach with requests for free tax help.

 

It’s probably how he meets girls too.  Berlusconi & The Lure of Tax Refunds (Robert Goulder, Tax.com).

CPA exam tip: Calm Down, This CPA Exam Practice Question Isn’t as Dirty as You Think (Going Concern)

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Tax Roundup, February 20, 2013: Fire fail and tax reform frenzy!

Wednesday, February 20th, 2013 by Joe Kristan
Flickr Image courtisy Llima under Creative Commons license

Flickr Image courtisy Llima under Creative Commons license

If you are going to say the dog ate your tax records, make sure you have a dog.  A New Jersey man was having a hard time coming up with records supporting his deductions in Tax Court.  He blamed a fire.  The success of the argument can be guessed from the Tax Court’s discussion of “Petitioner’s Alleged Fire”:

The circumstances surrounding petitioner’s purported fire are vague, and he has offered no evidence, apart from his testimony, that a fire occurred and that his 2006 tax records were destroyed in such a fire. Significantly, he failed to introduce insurance documentation or third-party testimony describing the alleged events or the extent of any fire.

The Tax Court said the man couldn’t support his deductions.

The Moral?  Back up your work.  And if you are going to have a fire, something needs to actually burn.  (Cite: Mears, T.C. Memo 2013-54)

 

It looks like the dreaded automatic “sequestration” spending cuts are going to happen, so there is a flurry of proposals to stop this sliver of random spending discipline:

Martin Sullivan, A Proposal to Get Tax Reform Back on Track:

Before earmarking what we will do with the money from limits on chimerical loopholes, our leaders need to clear the path for the painful process of broadening the tax base. President Obama has now poisoned the well by turning Republicans’ tax reform instincts against them. If they were to put any revenue increases on the table, the President would claim the proposals have the Republican seal of approval and incorporate them into his tax hike plans.

At the same time Republicans tax reform strategy is wearing thin. Their extravagant claims about cutting the top individual rates below 30 percent are just hollow speechifying as long as they refuse to put specific revenue-raisers on the table.

Inspiring leadership.

 

Jeremy Scott, Simpson-Bowles Try Again (Tax.com):

Simpson-Bowles is just another deficit reduction plan — and a politically infeasible one at that.  Its authors want to make it seem grander by attaching tax reform to it, just like Obama wanted his own proposals (which simply include ways to raise revenue that Democrats have proposed ad infinitum over the years) to sound better when he mentioned tax reform at least three times during the State of the Union.  But what they are offering isn’t comprehensive enough to qualify as true tax reform.  Deficit reduction has its place, but conflating it with tax reform will stall whatever momentum people like Camp are trying to create for a true tax system overhaul. 

They just aren’t serious yet.

Also:

Howard Gleckman, Bowles-Simpson II: A New Plan to Avoid the Sequester (TaxVox)

Patrick Temple-West, Simpson, Bowles revive deficit plan, and more

Jacob Sullum on Obama’s Misguided Vision of Tax Reform (Reason.com)

 

High taxes are good for us, so infinite taxes will make us perfect.  The high-tax advocacy group Citizens for Budget and Policy Priorities has generated a paper that says that state tax cuts do no good:

This paper argues that state personal income tax cuts won’t help small businesses create jobs, and in fact could harm the ability of the small-business sector to contribute to economic growth.  For all the reasons  stated in this paper, the converse is also true:  personal income tax increases, including those on the highest earners, won’t harm small-business job creation. 

Really?  There is no level of taxation that would discourage economic activity?  There is no level of tax increase that would cause economic activity to be located in a neighboring state with lower taxes?

The paper makes the same mistake as the guy who drowned trying to wade across the river that was only two feet deep, on average.  You can see it on the headings of the paper: “The vast majority of those who would get a personal income tax cut are in no position to create small-business jobs.”  “Most small businesses make too little money for tax cuts to produce enough income to pay new employees.”  “Most small business owners are not significant ‘job creators’ and have no plans to be.”

This is the same logic we heard when we were told that individual tax increases wouldn’t hurt business because most small businesses wouldn’t be affected.  When you define “small business” to include your office Avon Lady and a manufacturer with dozens or hundreds of employees, of course “most” businesses won’t hire more if taxes are lower.  Just the ones that matter.

When you measure by amount of income, the amount of business affected by individual rates is huge:20130220-1

 

Sure, relatively few businesses achieve enough success to hire a lot of employees.  Yet some do, and they do a lot of hiring.  And, contrary to the CBPP paper, their ability to expand does shrink if they have to pay more taxes.  As a tax accountant, it’s part of the world I live in.  Prices matter in making decisions — including the price of living, doing business and paying taxes in a state.  Any argument to the contrary has to overcome the basic rule of economics that incentives matter.

 

Paul Neiffer, 1031 Tax-Deferred Exchange Does Not Always Defer All Taxes!

Jack Townsend, Another Plea Agreement and Sentencing for HSBC and Bank Woori Depositor

Tax Trials,  Petition for Writ of Certiorari Filed in Historic Boardwalk Hall Tax Credit Case

Trish McIntire, FASFA?

 

Kay Bell, Tax Carnival #113: Presidents Day 2013 or maybe you, too, can one day be Acting President of the United States

Breaking news from 1147: Tax Havens: The Second Crusade (Robert Goulder, Tax.com)

Going Concern, The IRS Is Wasting Millions on Unused Blackberrys and Aircards Because Of Course It Is.  Meanwhile they prepare to lay off their useful employees when sequestration hits.

 

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Tax Roundup, 2/18/2013: Your tax dollars at work for somebody else.

Monday, February 18th, 2013 by Joe Kristan

 Why don’t some big companies complain about Iowa’s highest-in-the-nation corporation tax rate?  Because they are on the receiving end.

20130218-1The Department of Revenue last week issued the 2012 list of recipients of of the Iowa Research Activities Tax Credit over $500,000.  Like the Earned Income Tax Credit for the working poor, the Research credit is “refundable.”  If a recipient doesn’t actually owe tax, the state will send a check for the amount of the credit anyway.

For the working poor, the EITC is unabashedly a welfare program.  For the corporate recipients, the credit is touted as “economic development.”  I’m sure EITC recipients feel the same way about their government checks.

The report shows that about $34.2 million of the $50.5 million claimed in research credits was refunded — about 2/3.  The biggest recipient of the credit was Rockwell Collins, which received $13.8 million in credits.    The report doesn’t say how much credit was refunded for each large recipient; If 2/3 of the Rockwell Collins credits were refunded, that means Iowa taxpayers gave the company $9.2 million

I don’t believe Rockwell Collins, or anyone else, should pay Iowa corporation income tax.  It is a bad tax whose repeal would make life better for Iowans.  But that’s a long way from saying that taxpayers should actually cut annual welfare checks to corporations doing business in Iowa.   While I don’t blame them for taking the checks — who turns down free money? — don’t try to tell me that it’s good for me.

Repeal of giveaways like the refundable research credit and the “economic development” credits given to the big fertilizer companies would go a long way towards paying for repeal of the corporation income tax for businesses lacking the lobbyists and wire-pullers needed to hit the corporate welfare jackpot.  Maybe some day we’ll demand the legislature replace the tax-some, pay-others Iowa tax system with something better, like The Quick and Dirty Iowa Tax Reform Plan.

Speaking of Iowa Tax Reform, I have posted my analysis of the proposed Iowa 4.5% optional flat tax.

 

Dislike.  The left-wing high-tax advocacy group Citizens for Tax Justice is scandalized that Facebook isn’t paying income taxes on its 2012 income (via the TaxProf):

Earlier this month, the Facebook Inc. released its first “10-K” annual financial report since going public last year. Hidden in the report’s footnotes is an amazing admission: despite $1.1 billion in U.S. profits in 2012, Facebook did not pay even a dime in federal and state income taxes.

Instead, Facebook says it will receive net tax refunds totaling $429 million. Facebook’s income tax refunds stem from the company’s use of a single tax break, the tax deductibility of executive stock options. That tax break reduced Facebook’s federal and state income taxes by $1,033 million in 2012, including refunds of earlier years’ taxes of $451 million.

So why are “executive stock options” deductible?  Because they are taxable to the recipients as W-2 income.  They are reported as taxable income on the executives 1040s at the same 35% top rate that the corporation pays.  In other words, CTJ is upset because the executives, rather than the corporation, write the checks to the IRS.

There is no actual tax reduction.  In fact, the government actually gets more income from the options than if Facebook had not issued the options and just paid 35% tax. Because they are also subject to the 2.9% medicare tax (3.8% starting in 2013), the option exercises actually generate additional revenue for the IRS.  Presumably CTJ would want the executives to pay tax with no deduction on the other side.  That seems unjust.

 

Another victory for Citizens for Tax Justice!  After Illinois Tax Increase, State Farm Reportedly Moving Operations to Texas (Joseph Henchman, Tax Policy Blog).

 

Peter Reilly, Married Same Sex Couples – Windsor Decision Requires Action This Tax Season

Kay Bell,  Sign up now to pay your federal tax bill via EFTPS.  With the ongoing disintegration of the postal service, it’s good to have a secure and sure way to get your taxes paid on time.  I’m signed up.

Tony Nitti,  Former San Diego Mayor Gambles Away $1 Billion; What Are The Tax Implications?

Martin Sullivan, Taxation of Intangibles: Still Hazy After All These Years (Tax.com)

Roberton Williams, A New Marriage Penalty for High Earning Couples—and a Bonus for Some (TaxVox):

Our new Marriage Bonus and Penalty calculator, despite all its  Valentine’s Day finery, ignores the new 0.9 percent Medicare payroll tax hike buried in the 2010 health law. The extra levy affects only a few high-income couples but in very different ways. Lucky couples will collect marriage bonuses of up to $450. But those less fortunate—if anyone making $250,000 can be considered less fortunate—will incur marriage penalties of as much as $1,350 in additional Medicare tax.

Just another example of the whimsical and poorly-conceived nature of the Obamacare Net Investment Income tax.

 

Brian Mahany, IRS Wins Tax Shelter Case – Will Claims Of Accounting Malpractice Follow?

Jack Townsend,  New Plea Agreement Involving Israeli Banks

Robert Goulder, Jack Lew, the Cayman Islands & FATCA (Tax.com)

Ben Harris, Five reasons Why the Sequester’s Automatic Spending Cuts are Bad Policy (TaxVox).

Yeah, that’ll work.  Newtown Lawmaker Proposes ‘Sin Tax’ On Violent Video Games (TaxGrrrl).

 

Traverse City!  I will be speaking at a Farm Income Tax, Estate and Business Planning Seminar in Traverse City, Michigan June 13-14.  The seminar is co-sponsored by the Iowa State University Center for Agricultural Law and Taxation.  Other speakers include Roger McEowen and Paul NeifferRegister now!

 

Chicago! Jackson’s Fall Includes Tax Charge (Russ Fox):

The last three governors of Illinois all went to prison (and it’s equal opportunity corruption: both Republicans and Democrats).  Joining them will be former Congressman Jesse Jackson, Jr. and his wife, Sandi (a former Alderman in Chicago).

Mr. Jackson resigned last November from Congress; Ms. Jackson resigned in January from the Chicago City Council.  Both are pleading guilty: Mr. Jackson to conspiracy and Ms. Jackson to filing a false tax return.  They pleaded guilty on Friday.

The scheme apparently had them using “business” credit cards (here, business is their re-election campaign) for personal expenses.  As this blog has highlighted numerous times in the past (and will likely do numerous times in the future), you can’t put personal expenses on a business return.  And we’re not talking nickel and dime purchases; the total is $582,772.58.  Add in filing false campaign reports and you have problems.

When people complain about the need to turn power over to government instead of “greedy corporations,” there is an implied assertion that the government and its operatives are somehow less vulnerable to avarice and self-dealing.  Against all evidence.

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Tax Roundup, 2/13/2013: The President wants more taxes. Because they’re doing such a good job with what they get now.

Wednesday, February 13th, 2013 by Joe Kristan

State of the union:  raise taxes more.  It will never be enough.  If you think we don’t have a spending problem, or think we can solve it through “closing loopholes,” check out three charts gathered by Veronique de Rugy:

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20130213-3

The President proposes nothing serious.

Breaking news from yesterday: Look for a Call to End Oil “Subsidies” in Tonight’s State of the Union (Andrew Lundeen, Tax Policy Blog)

Howard Gleckman, Obama’s State of the Union and the Great Deficit Smackdown (TaxVox)

 

How H&R Block guy got to write preparer regs.  Civil Service! Tim Carney reports:

In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a “co-leader” (in the words of an IRS spokesman) in drafting new regulations for tax preparers.

This seems to clash with President Obama’s executive order barring appointees from working on regulations directly affecting their former employers.

But thanks to a fine legal distinction, these rules didn’t cover Ernst. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” an IRS spokesman wrote me. “The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees.”

Nobody here but us chickens.

 

Jason Dinesen has a new installment about his client whose identity was stolen in the ID theft epidemic that really got rolling while the IRS was busy regulating preparers.  “If you hired the best comedy writers and satirists in Hollywood, they couldn’t come up with a more farcical script about government ineptness.”

Speaking of government competence:

Not only will most farmers have to file after March 1, 2013 due to a delay in tax forms by the IRS, we  now have an announcement that almost all form 1099s issued by the USDA for Natural Resources Conservation Services payments in 2012 are either wrong or were never issued.

via Paul Neiffer.

 

David Brunori, If You Hate or Love Excise Taxes Read this New Report:

A new working paper  recently released by the Mercatus Center at George Mason University… finds that contrary to conventional wisdom, sin taxes are often not used to correct externalities but rather for general fund spending. My take on that is politicians don’t really care about externalities. They would like to raise money from people whose activities they despise. The report also found that the goal of “sin taxes” has changed from correcting market failures to protecting consumers from their own choices. That is, people are too stupid to run their own lives and they need help. Finally, the report finds that sin taxes are regressive, i.e., they punish the poor. Unfortunately, my liberal friends never get exercised over this issue. Maybe it’s as the great PJ O’Rourke surmised, liberals hate poor people. 

If they would just not wear those icky Wal-Mart clothes and watch their weight, like they tell them to… (Tax.com)

 

Peter Reilly,Even Real Estate Salesman Has Trouble With Passive Loss Exception

Even accepting that he spent 520 hours working on his own properties, he still lost.  Two of the properties were short-term vacation rentals and one was being readied for sale.  The time spent on those properties could not be grouped with the time spent on properties dedicated to long term rentals.

As Peter notes, this becomes an even more important tax issue with the new 3.8% tax on “passive” income this year.

 

Kay Bell,  When will you get your tax refund? Whenever

Trish McIntire, Child Tax Credit Delays

TaxGrrrl, Spammers Target Taxpayers Expecting Tax Refunds.  If you get an email about your refund from the IRS, it’s not from the IRS.

Jack Townsend, Another Bull**** Tax Shelter Bites the Dust

Roger McEowen, Another Court Issues Ruling on Tax Impact of Demutualization.

Tax Trials,  Second Circuit: Co-Op Owner Is Entitled to Casualty Loss

Patrick Temple-West, Navigating between tax avoidance and evasion, and more

Gene Steurle, Desperately Needed: A Strong Treasury Department (TaxVox)

Robert Goulder, La Bella Italia: Fast Cars & Loose Taxes (Tax.com)

Jim Maule, When Spending Cuts Meet Asteroids: The Value of Taxes.  Taxes and spending can never be too high because, you know, asteroids!

The Critical Question.  Minnesota’s Sexiest Accountant Contest: Cute or Creepy? (Going Concern)

 

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Tax Roundup, 2/4/2013: District Court declines to stay decision stopping IRS preparer rules. And ___ Anniversary!

Monday, February 4th, 2013 by Joe Kristan

20130121-2Not surprisingly, the judge who ordered the IRS to shut down its preparer regulation program declined to stay his order.  The IRS asked James Boasberg, the U.S. District Court Judge who ordered the IRS to stop its preparer regulation program, to stay his order pending an appeal.  The judge declined:

As the factors beyond likelihood of success do not decisively tilt in favor of the IRS — indeed, they tip somewhat against — the Court sees no basis to lift its injunction pending appeal. Nor does the Court believe it warranted to suspend the injunction for fourteen days to permit the IRS to seek a stay in the Court of Appeals. This would only lead to more confusion for preparers and their clients as the tax season gets underway. While nothing in this decision prevents the IRS from seeking such relief there, the Court sees no benefit of a brief stay while it does so.

So where do things stand?  The IRS will be allowed to continue to administer the Registered Tax Return Preparer test and issue PTINs, but it cannot require RTRP tests or CPE, or collect fees for them.  Whether the IRS will continue testing on a voluntary basis, or whether there will be takers, remains to be seen.

More coverage from TaxGrrrl: IRS Loses Big In Court (Again), Tax Season Chugs Along; and Russ Fox: IRS Loses Again to Institute for Justice.

 

You surely didn’t miss the 100th anniversary of the 16th Amendment yesterday.  They had a football game and everything to observe it.  The 16th Amendment, which gave rise to the current income tax, was ratified by Delaware on February 3, 1913, making it official.  And yes, it is official.  While some tax protesters insist that the 16th Amendment was never properly ratified, all the federal judges say otherwise — not to mention the folks at IRS, the U.S. Marshals Service and the Bureau of Prisons.  So, in any way that matters, it’s official.  Still, I can’t bring myself to say “Happy” anniversary.

More from Richard Morrison:  100 Years of the Federal Income Tax (Tax Policy Blog)

 

Iowa’s oldest judge, age 90, steps downRuth Klotz, a Polk County Probate Judge, remains respected by the lawyers I know who practiced in her court.   Happy Retirement, Judge Klotz!

 

Paul Neiffer,  Many States Are Delaying Farmer Filing Deadline

Jack Townsend, UBS Depositors Fail on Pleadings in Civil Case Against UBS

Kay Bell, Tips are taxable income

TaxGrrrl, Pay Taxes On Your Super Bowl XLVII Winnings? You Can Bet On It

Trish McIntire,  Gambling 1099MISCs.  They don’t make your winnings taxable, they just let the IRS in on the secret.

Patrick Temple-West,  Early payouts of dividends, bonuses spur a windfall, and more (Tax Break)

Martin Sullivan, Is Aggressive Tax Avoidance Moral? (Tax.com).  Strange question.  If you are paid to maximize shareholder returns, is it moral to do less than your best to do so?

Rudy Penner,  The Risks of Dumbing Down Fiscal Goals (TaxVox).  It’s hard to think they could get any dumber than they are now.

 

Jim Maule,  Looking Again at Tax and Political Ignorance:

The study’s conclusion is disheartening. The authors conclude that incumbents can get themselves elected by associating themselves with good news for which they ought not take credit because they are not responsible, support policies that generate good news for their districts even if they are bad for the nation, and to use rhetoric to distract voters from the incumbents’ histories.

Perhaps this will lead the good Professor to reconsider his preference for government solutions over market outcomes.

Linda Beale,  Red state tax “reform” and “economic growth”

Robert D. Flach, JUST ONE MORE THING, HE SAID COLUMBO-LIKE

 

The Critical Question: The Devil Wears Prada, But Does Her Boyfriend Pay Taxes? (Robert Goulder, Tax.com).

What this country needs is a good 25-cent sneaker.  Illinois Proposes 25-Cent Sneaker Tax (TaxProf)

It’s the little things.  The mark of a true craftsman is attention to detail.  Two Ohioans’ alleged failure to mind the details has led to trouble.  From the Columbus Dispatch:

Roma L. Sims, 34, and Samantha C. Towns, 30, were arrested on Thursday and charged with aggravated identity theft, conspiracy and wire fraud for using the identities to file tax returns and rake in $1.3 million.

But they misspelled several cities when they listed return addresses: Louieville and Pittsburg, according to the criminal complaint. Those geographic goofs caught the attention of investigators.

So did misspelling some of the occupations they listed on the phony tax returns.

I bet they thought those spelling drills in grade school were pointless.

 

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Tax Roundup, 1/30/2013: Bah. Humbug. And where states get their cash.

Wednesday, January 30th, 2013 by Joe Kristan

20130130-4Why so grumpy?  Because it’s the first “official” day of tax season as the IRS begins processing returns.   But only some of them.  The last-minute Fiscal Cliff tax law is delaying the processing of many forms, delaying most business filings until “late February or into March.”  They also have delayed processing of returns with education credits until sometime next month.

Oh, and the streets are a mess.

Kay Bell,  Tax filing on hold for taxpayers who need 31 federal forms

TaxGrrrl, IRS Opens For Business Today, Many Taxpayers Qualify To File For Free

 

Taking your money to give to the well connected.  From Taxing the Rich to Pay for Big Business Tax Credits by Veronique de Rugy:

 

20130130-1

Taking from the small businesses, giving to the big business with pull.

 

Brian Gongol on the decision of Senator Harkin to not seek an umpteenth U.S. Senate term:

Wouldn’t it be wonderful if we could start with a blank slate and ask ourselves (as Iowans): Who is the smartest, most dependable, most thoughtful person we could send to an august body of decision-makers who are challenged with bringing wisdom and sobriety to the decision-making process of government?

Like somebody like that would stand a chance.

 

Why bother with a state corporate income tax?  While state income taxes are a reliable source of work for people like me, they do surprisingly little for the states, according to a new report released by the Tax Foundation yesterday.  Nationwide state corporate income taxes accounted for only 3% of 2010 state revenues.  In Iowa, it’s even lower.  Here are the revenue sources from Iowa and some nearby states:

Source: Tax Foundation

Source: Tax Foundation

 

The corporation income tax raises little revenue, is expensive to administer, is exploited by the well-connected and well lobbied, and is almost certainly a job-killer.  Why not go for a low-rate, low-loophole system like The Tax Update’s Quick and Dirty Iowa Tax Reform Plan?

TaxProf,  A Distributional Analysis of the Tax Systems in All 50 States, passing on a report from the Center on Budget and Policy Priorities says state tax systems are regressive.  Keep this in mind:

Source: Heritage Foundation/

Source: Heritage Foundation/

If you only look at the distribution of taxes paid and ignore the value of services and cash payments received, you miss a lot.

 

Janet Novack,  IRS Tips Won’t Protect You From Identity Theft Tax Fraud.

Jack Townsend,  Article on Importance of Jury Instructions in White Collar, including Tax, Crime Cases

Jason Dinesen, An Obligatory 1099-K Post for 2013

Trish McIntire,  Before You Sign.  A timely reminder that you are responsible for what’s on your return, even when you use a paid preparer.

Patrick Temple-West,  Mickelson and the sports star migration, and more (Tax Break)

William McBride, CRS: Tax Rates Do Matter for Profit Shifting (Tax Policy Blog)

Joseph Thorndike, The Income Tax Is Inquisitorial — Get Over It(Tax.com) May he have a good National Research Project exam in his future.

Robert Goulder, French Budget Minister Caught In Tax Probe (Tax.com)

That wouldn’t take much.  Payroll Tax Cuts May Boost the Economy More than You Think (Howard Gleckman, TaxVox)

 

Bad news, good news:  The Twinkie is Dead! Long Live the Twinkie! (Megan McArdle).

News you can use.  Tax Law Warning: Don’t Cut Mom a Rent Break (Jim Maule)

 

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

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

Via Wikipedia

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

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

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

Some legislators are more ambitious, reports Henderson:

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

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

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

 

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

 

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

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

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

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

Robert goes astray in his next paragraph:

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

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

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

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

Substitute “RTRP” for “unenrolled preparer.”

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

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

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

 

Trish McIntire, Preparer Conflict of Interest

 

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

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

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

 

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

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

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

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

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

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

 

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

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

IRS Releases Additional Inflation-Adjusted Figures for 2013

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

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

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

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

 

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

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

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

Tuesday, January 8th, 2013 by Joe Kristan

 

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Dave Jamison

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

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

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

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

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

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

More from  WHOTV.com.

 

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

 20130108-1

 

Fiscal Cliff Notes

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

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

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

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

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

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

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

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

A falling tide lowers all boats.

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

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

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

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

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

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

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

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

 

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

Trish McIntire, More ITIN Info

Missouri Tax Guy,  Married Filing ….

Jack Townsend, HSBC Depositor Pleads Guilty to Conspiracy

Kay Bell, Tax moves to make in January 2013

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

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

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

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

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Tax Roundup, 1/3/2013: Now Iowa’s filing season is a mess.

Thursday, January 3rd, 2013 by Joe Kristan
The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Fiscal Cliff Bill complicates Iowa tax returns for 2012.  Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly.  From an Iowa Department of Revenue e-mail to practitioners yesterday:

The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:

  • Educator Expenses (Line 24; IA 1040)
  • Tuition and Fees (Line 24; IA 1040)
  • Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
  • Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
  • The federal section 179 expensing limit of $500,000 for 2012 and 2013 

Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.

Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.

 

Why 12%?  Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income.  Where did I get that number?

I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa.  That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket.  Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax.  That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.

The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill.  For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income.  The result is a hidden 1.188% additional tax.  Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax.  That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.

Should I assume the 3.8% passive income tax, like I do in the above examples?  It won’t apply to K-1 income if all owners “materially participate” in a pass-through business.  Those taxpayers face “only” an 8.41% reduction in their after-tax income.  If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.

But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners.  The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered.  For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.

 

Fiscal Cliff Notes

TaxProf,  House Approves Fiscal Cliff Tax Deal

Megan McArdle, After the Fiscal Cliff: What do Democrats Want?  “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”

Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012

William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded

TaxGrrrl, The World Will Keep Turning, Even With The Expiration Of The Payroll Tax Cuts

Patrick Temple-West, Cliff bill means some pay more taxes, and more

Trish McIntire, American Taxpayer Relief Act of 2012

Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!

Kay Bell,  What’s your 2013 tax rate and other fiscal cliff tax bill questions

Margaret Van Houten,  Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)

Courtney A. Strutt Todd,  A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)

Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)

 

Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:

Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6

 

Russ Fox,  Your Mileage Log: Start It Now!  Great advice.  If you travel on business and the IRS comes by, you’ll be glad you have that log.

David Brunori,   Only Tax Professionals Benefit from the State Corporate Tax.  (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.

Peter Reilly, Form 8332 – Don’t Let The Kids Live In Another Home Without One ?

TaxTV, IRS Penalty Relief-First Time Penalty Abate Program

Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)

Jack Townsend, New Article on the Emerging Consensus for Taxing Offshore Accounts

William Perez,  Social Security Tax For 2013

 

Career planning news you can use:  Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It  (Going Concern)

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Tax Roundup, 12/31/2012: No cliff deal yet. And Branstad won’t try to fix income tax this year.

Monday, December 31st, 2012 by Joe Kristan

No cliff deal.  As of this morning, the President and Congress continue to fail to to make a “fiscal cliff” deal.  Rest assured, though, that even when they cobble together a lame and harmful deal, as they will today or weeks from now, they won’t even begin to address the real fiscal calamity — the government’s incontinent spending.

The unforgivable sin of the current president, and the last one, and their Congressional enablers, is spreading the idea that the government can buy us all free stuff, and the rich guy will pick up the tab.  Sorry.  The rich guy isn’t buying.

 

Income taxes: the redheaded stepchild of Branstad tax policy?  It looks more and more like the Branstad agenda for the 2013 Iowa legislative session  won’t include income tax reform.  From the Sioux City Journal:

Asked during a recent interview if there was room in all that for income tax reductions during the 2013 session, Branstad replied: “Probably not.”

“Honestly, property tax would be my priority and I’d love to do income tax, too, and maybe, if revenues exceed expectation, we could provide some income tax relief in addition,” Branstad said. “But I think I would rather focus and get something permanent done on the property tax. That’s the place where we’re the least competitive.”

That’s a shame.  Given the economically unwise attitude of the Senate leader, maybe nothing is possible:

Senate Majority Leader Mike Gronstal, D-Council Bluffs, said he would need more details but at first blush he doubted it would go very far in the legislative process if it proved to be “just a way for the wealthiest Iowans to cut their taxes dramatically” while middle-class families picked up a greater share of the tab for the cost of state government.

That’s just silly.  The rich guy isn’t buying for Iowa either.  The wealthiest Iowans always can dramatically cut their taxes with a moving van, until Senator Gronstal figures out a way to keep them from escaping to zero-tax South Dakota or Florida.

Iowa’s income tax is way overdue for replacement.   Instead, it will get more Bondo and bumper stickers.

If Iowa's tax law were a car, it would look like this.

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

 

Fiscal Cliff Notes:

Greg Mankiw, New York Times:

When President Obama talks about taxing the rich, he means the top 2 percent of Americans. John A. Boehner, the House speaker, talks about an even thinner slice. But the current and future fiscal imbalances are too large to exempt 98 percent or more of the public from being part of the solution.       

Ultimately, unless we scale back entitlement programs far more than anyone in Washington is now seriously considering, we will have no choice but to increase taxes on a vast majority of Americans.

Think Finland.  Unless we choose to be Greece or Argentina.

Gongol: Fiscal Cliff…not resolved. I note a false choice:

The people who make the decisions at the highest level in this republic are either dishonest or utterly economically incompetent if they don’t say the following out loud: “We are demanding more out of our government than we can presently afford. We need to pay more, get less, or both.”

“Either?”  I say “both.”

Kay Bell: Senate ready for some football; adjourns Sunday without reaching fiscal cliff deal

TaxGrrrl, Budget Talks Stall As Reid Calls Latest GOP Move A ‘Poison Pill’

Kevin Drawbaugh, Fiscal cliff talks down to the wire (Tax Break)

Nick Kasprak, 2012 Likely to be First Year Without AMT Patch

Peter Reilly, Dysfunctional Congress – At Least They Are Not Maiming One Another.  If they don’t, maybe we should.

 

The roundup:

Cara Griffith, What Will Become of Physical Presence? (Tax.com)

Paul Neiffer,  Be Careful Of Fiscal Year Section 179 Issues!

Jason Dinesen,  6 Tax Predictions for 2012 — How Did I Do?

Tres Bien. French Court:  75% Tax Rate on Millionaires Is Unconstitutional (TaxProf)

Robert Goulder, Gérard Depardieu: Tax Exile (Tax.com)

TaxGrrrl, Congress Hasn’t Fixed The Budget Yet, Getting A Raise Anyway.  Courtesy of the President, who maybe thinks they make him look good by comparison.

Chris Sanchirico, New Ways to Think About a Tax on Public Companies

Insureblog,  Cavalcade of Risk #173: Post-Mayan Apocalypse Edition

The Critical Question: Is This Tax Preparation Nightmare Reawakening? (Jim Maule)
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Tax Roundup, 12/28/2012: Last tax planning weekend of 2012. Also: the crisis of unreported pretend income!

Friday, December 28th, 2012 by Joe Kristan

20121228-2There’s not much time.  There are 366 days in 2012, but only four left.  It’s asking a lot of the last four days of the tax year to fix the tax problems of the other 362, but there are a few things you can still do.  You can still make charitable contributions that count this year.  You can get your last mortgage payment paid this year, making the interest on it deductible.  You can pay cash-basis business expenses.  You can even start a qualified pension plan, technically (good luck getting it drafted and in place by Monday, though).

Some last-minute rules to keep in mind:

Timely-mailed is timely-paid.  If you make a deductible payment by check, the postmark date is the date for deduction.  If the check is big enough to matter, take it down to the post office and send it Certified Mail, Return Receipt Requested.

Electronic payments count.  The nice thing about an electronic payment is that there is no dispute about when it happened, and it won’t get lost in the mail.

Credit card payments count.  If you make a payment – say, a charitable contribution – by credit card before the ball drops Monday night, it counts as a 2012 deduction, even though you won’t pay your credit card bill until next year.

Gifts of stock have to be completed by the end of business Monday.  If you want to make a gift of appreciated stock, it needs to be nestled in the recipient charity’s account by the end of the day Monday.  That might require some quick action by both your broker and your charity.

Many related parties are on cash basis for deductions, even for accrual taxpayers.  If you owe your nephew money out of your S corporation, you need to get him paid by Monday to get the deduction this year.

Capital gains and losses count on the trade dateExcept for short sales, which count on the settlement date.

Remember, this year is a bit crazy with the tax increases coming down next year, and with the Fiscal Cliff uncertainty.  Income tax rates are rising for higher-income folks, so the usual year-end deferral of income might not be a great idea.  With higher rates next year, business deductions might well be worth more then, so the usual frenzy of paying cash-basis business expenses may not be your best bet.

With itemized deductions, it’s very hard to tell.  While higher tax rates usually would mean deduction will be worth more next year than this year, plans have been floated to either cap the total amount of itemized deductions — $25,000 and $50,000 have been thrown out — or to cap the tax benefit at, say, 28%, regardless of the top rate.  Some taxpayers with big charitable pledges have moved them up to this year to hedge against a deduction cap.

 

The House of Representatives reconvenes Sunday.  Is a Fiscal Cliff deal going to happen before this year closes?  Don’t hold your breath, if this story from Tax Notes is any guide ($link):

     As President Obama and senators returned to Washington December 27, aides to House Majority Leader Eric Cantor, R-Va., announced that the lower chamber will not return for legislative business until December 30 and that the House may be in session through January 2.

     The House schedule suggests that a fiscal cliff deal, if there is one, will not come until sometime between 6:30 p.m. December 30, when first House votes are expected, and late January 2. The 113th Congress is scheduled to convene January 3 at 12 p.m.

The best we can hope for is that they pass something with an AMT patch so that the upcoming tax season isn’t thrown into chaos.  There’s no hope that they’ll actually address the incontinent spending that is leading the government to fiscal catastrophe.

Fiscal Cliff Notes

TaxProf,  CNBC: Will ‘Fiscal Cliff’ Accelerate Millionaire Deaths?

Kay Bell, Fiscal cliff is important, but don’t forget some 2012 tax laws need attention ASAP

Kevin Drawbaugh, Factbox: Corporate tax breaks in play at “cliff” and beyond

Trish McIntire, Tax’s Perfect Storm:

Congress only has 4 days to do something about taxes (if they’re willing to work the weekend). And the situation has gotten more complicated with Treasury Secretary Geithner’s announcement that the US will reach our debt ceiling on December 31st.  4 days to do what they refused to do earlier in the year and haven’t been able to do in the last few weeks. I’m not hopeful.

William McBride, The Fiscal Cliff in History (Tax Policy Blog):

As the chart below shows, it will result in the highest tax rate on individual income (39.6 percent) since 2000, the highest tax rate on capital gains (23.8 percent) since 1997, and the highest tax rate on dividends (43.4 percent) since 1986.

20121228-1

 

 

David Brunori, Michael Moore and Film Tax Credits (Tax.com)

Paul Neiffer,  Farm Income Not Cash Rent!

Russ Fox, Is It Time to Take a Casualty Loss on Absolute Poker/Ultimate Bet?

TaxGrrrl, 12 Days of Charitable Giving 2012: ShelterBox

Robert D. Flach, 2012 – THE YEAR IN TAXES

Robert Goulder, Gérard Depardieu: Tax Exile (Tax.com)

Oh, Goody: 2013 May Be the Year of Perpetual Fiscal Crisis (Howard Gleckman, TaxVox).

 

Let’s make people file lots of extra forms because I think they’re getting away with something.  The TaxProf links to an odd piece in the Washington Post by a Ray D. Madoff. who seems to think the rich are up to something.  He’s not sure what, though, so we should have everybody file a bunch of extra tax forms so he can figure it out.

He says sure, the income tax code is progressive:      

 The IRS recently released its analysis of 2010 tax returns,  which shows the allocation of taxes over different income groups. This information is both informative and misleading. According to these latest figures, in 2010 the top 1 percent of earners (those with adjusted gross incomes of at least $369,691) paid about 37 percent of all income taxes but reported just less than 19 percent of all income. Based on these data, the U.S. income tax system looks truly progressive.  This lends credence to the view that the wealthy are paying even more than their fair share.

Ah, but what are they hiding?

But statistics can be only as good as the information on which they are based, and here the data are fundamentally misleading. People pay income  tax only on amounts that Congress counts as income. This excludes the sources of revenue most commonly enjoyed by the richest Americans: gifts, inheritances, distributions from trusts and proceeds of life insurance.

So what does he propose to do?

It is time for Congress to shine a light on the types of income most enjoyed by the wealthy. Individuals should be required to report all sources of income, including gifts, inheritances, life insurance and distributions from trusts so that we can begin to assess the impact of these exclusions.

First, to point out an obvious error: most distributions from taxable trusts are already reported on two income tax returns.  Trust income follows trust distributions.  Trusts get a deduction when they make a distribution, so they have to file a K-1 with their 1041 to report the distribution and the allocation of distributed income.  The beneficiary reports the K-1 amounts on Form 1040.  Income from revocable trusts is reported directly on the grantor’s return, so distributions are irrelevant.

Second, the big inheritances and gifts are already reported — just not on income tax returns.  Gifts over the annual exclusion amount are already reported on Form 709, and large estates file Form 706.  Does he really want everybody to have to keep track of their birthday presents and gifts from Grandpa for 1040 reporting?

Finally, this stuff isn’t income.  A gift is a distribution of wealth; it reduces the donor’s wealth as much as it increases the recipients.  It’s a wash, a nothing.  Same thing for trust distributions — they are funded by reducing the grantor’s wealth, and the distributions are either income distributions or delayed transfers from the donor.  Life insurance proceeds are arguably income, but they are already normally reported on 1099-R.

So what is his point?

Everyone agrees that fairness matters when it comes to income taxes. But we cannot have an honest discussion about tax fairness when we are kept in the dark about how much income people actually receive. Only when full reporting is required can we have an accurate picture of people’s true income. Then we can begin to fashion a tax plan that is fair for all Americans.

It’s nice that he wants to have an “honest” discussion.  He could start by honestly saying that he really just wants to raise income taxes on “the rich”, but is hampered by statistics inconveniently showing that they are already paying a lot of taxes.  He wants to try to drag in a lot of things that aren’t actually income into the mix to make it look like the rich should be paying more.  Sorry: the rich guy isn’t buying.

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Tax Roundup, 12/19/2012: B is for Boehner. And Blizzard.

Wednesday, December 19th, 2012 by Joe Kristan

20121219-1Plan B.  House Speaker Boehner has proposed a “Plan B” that would increase the top rate to 39.6% for taxpayers with taxable income over $1 million.  Tax Analysts reports ($link):

Boehner’s Plan B would also permanently extend the alternative minimum  tax patch and the current-law estate and gift tax rules with a portable  $5 million individual exemption and a 35 percent top rate. Dividends and  long-term capital gains would be taxed at 15 percent for income below  $1 million and at 20 percent above that threshold. The bill would not  renew any tax extenders, emergency unemployment insurance, or the 2 percentage point payroll tax cut, and would not raise the federal debt limit.

It’s nice to see a permanent AMT fix in both the Boehner and Obama plans.  I like not renewing any of the “extenders,” but I suspect he plans to do that separately next year anyway.  An estate tax fix is also welcome.  It looks like there is no hope continuing the 15% rate for dividends or capital gains.

 

Meanwhile, a blizzard approaches.  From KCCI.com:

Six to 12 inches of snow is expected by Thursday morning. The heaviest snow axis will be along a line from near Des Moines to Tama. The lowest amounts are expected near the Missouri border. Snow drifts several feet deep will be possible given the strong winds.

Winds/visibility:

Winds will become very strong Wednesday night from the north northwest. Sustained winds of 25 to 35 mph are expected with gusts over 45 mph possible.

I know what I’m doing tomorrow morning.  Hello, shovel.

 

Fiscal Cliff Notes

Wall Street Journal,  Boehner Weighs ‘Cliff’ Backup Plan

Janet Novack,  Strange Bedfellows: Boehner, Buffett And Obama All Support Millionaires Only Taxes

Andrew Lundeen,  How Many Days of Christmas Could the Fiscal Cliff Buy? (Tax Policy Blog)

Joseph Thorndike,  Republicans Shouldn’t Pin Their Hopes on The Origination Clause.  “In practice, the Origination Clause is more a nuisance than an obstacle to tax-happy senators.”

Howard Gleckman, What Adjusting the Price Index Would Mean for Taxpayers (TaxVox)

Rudy Penner,  How to Control Entitlements: A Challenge Ike Did Not Face (TaxVox)

 

TaxProf,  Fleischer: How Local Tax Rates Affect High-Income Professionals:

The study finds that an increase in the marginal income tax rate leads to a decrease in the average skill of the NBA free agents that migrate to that team. Unlike in baseball, basketball teams in high-tax jurisdictions actually end up with a worse free-agent talent pool, all else equal. …

These papers do serve as a useful reminder that if the goal is to remedy income inequality, state and local taxes are a weak policy instrument. To the extent that tax policy is used to achieve redistribution, redistribution should take place at the federal level.

Despite what Warren Buffett, the President, and the Speaker of the House say, marginal rates matter.  That’s also true at the state level; when you have to bribe businesses to locate in your state, as Iowa likes to, you have a sick tax systemRelated: David Brunori, If the Shoe Fits: Oregon Lawmakers Get Rolled (Tax.com)

 

Kay Bell,  Cupid says note year-end marital status; Reindeer Year-end Tax Games Tip #6

Paul Neiffer,  Annual Exclusion Does Not Eat Into Lifetime Exclusion.

Trish McIntire,  Identity Theft PIN

Peter Reilly,  Tax Court Not Quick To Find Abuse In Innocent Spouse Case

TaxGrrrl,  Lawmakers, Guns and Money: Where Do We Go After Sandy Hook?

Robert Goulder,  Starbucks Pays More Tax Than It Owes (Tax.com).  That’s silly.

It’s Wednesday, so it’s time for a fresh Buzz.  Robert D. Flach obliges.

 

The world is saved from its most dangerous criminals.  Quebec Police Arrest 3 in Maple Syrup Heist

 

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Tax Roundup, 12/11/2012: Red Oak! And impossible dreams.

Tuesday, December 11th, 2012 by Joe Kristan

The Tax Update is in Red Oak, Iowa today for the seventh tour date for the Iowa State University Center for Agriculture and Taxation Farm and Urban Tax School.  This is our first visit to Red Oak.  From Wikipedia:

Red Oak is a city in and the county seat of Montgomery County, Iowa, United States,[3] located along the East Nishnabotna River. The population was 5,742 in the 2010 census, a decline from the 6,197 population in the 2000 census.[4][5]

..

The community has had a disproportionate number of casualties in the Civil War and World War II.

In the American Civil War, the area provided more Union troops per capita than any other in the state.[10] Company M (which also included residents from Montgomery County had 160 casualties among its 250 members; 52 men were killed in action.[11]

Early World War II battles claimed a disproportionate number of soldiers from Red Oak (although the final casualty statistics tend to disprove the oft-repeated statement that Red Oak suffered more losses per capita than any other American community).[10][12][13] In the Battle of the Kasserine Pass in February 1943, forty-five soldiers from Red Oak alone were captured or killed.[14] At the time more than 100 telegrams arrived in Red Oak saying that its soldiers were missing in action.[15]

Here is the crowd:

 

I can confidently endorse the Red Oak coffee and donuts.  Register now for the last session next Monday in Ames!

 

Eric Toder,  The Coming AMT Debacle. (TaxVox)   If Congress fails to pass an alternative minimum tax “patch,” the AMT is slated to rise drastically for 2012:

Overall, AMT liability will rise from $34 billion to $120 billion. Of that $86 billion increase, new AMT taxpayers will owe $64 billion—an average of about $2,250–while those currently on the tax will pay another $22 billion—an increase of about $5,500 each over the nearly $8,500 average they would pay with a patch.

If you suspect that a tax that affects 32 million households is not limited to the rich, you are right. It is true the enhanced AMT will hit upper middle-income taxpayers the hardest – 98 percent of those with adjusted gross income between $200,000 and $500,000 will pay an average of almost $11,000 in AMT on top of their regular tax liability.

With our political class, failure is always an option. 

 

David Henderson, When Taxes are Cut, What Does Regressive Mean?:

The bottom line is this: Start with any system of progressive taxation, cut everyone’s taxes by the same percent, and you will have implemented, by their standard, a regressive tax cut.

Exactly.  If you only tax rich people, any tax cut “disproportionately benefits the rich.”

Greg MankiwMake Your Own Deficit-Reduction Plan, links to a Wall Street Journal’s interactive graphic featuring deficit reduction options.

Janet Novack, Gucci Match: Fiscal Cliff Tax Fight Pits The 2% Against The 0.1% And The Richest 400

Anthony Nitti,   Here’s Your Update On The Fiscal Cliff Negotiations: Both Parties Agree That the Other Party’s Proposal Stinks.  This time, they’re both right.

 

Paul Neiffer,   Watch Your Timing On Year-End Gifts 

Brian Strahle, D.C. Ruling Presents Franchise Tax Opportunity

Jack Townsend, I Should At Least Mention Stolen Identity Refund Fraud

To dream the impossible dream… Musical theater maven Robert D. Flach tilts at a windmill:

I have a dream that our elected officials in Washington can create a simple and fair Tax Code.
 
I have a dream that our elected officials in Washington are really not just self-centered and self-absorbed idiots.

That’s right up there with my dream of winning the Triple Crown. As a horse.

No, we’ve been trying that for a long time here.  Can tax on witch-doctors cure Swaziland’s fiscal pain? (Nanette Byrnes, Tax Break)

That’ll work:  Alan Simpson goes ‘Gangnam Style’ in deficit reduction video effort  (Kay Bell)

Sacre Bleu!  Gerard Depardieu Leaves France After Tax Increases (Joseph Henchman, Tax Policy Blog)

Robert Goulder,  Timeless Tax Policy & The Other Colbert (Tax.com)

It might someday help him clear the AGI floor for health cost deductions:  Law Student Wins Krispy Kreme Doughnuts for a Year and Wonders: What Are the Tax Consequences? (Tax Prof)

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Tax Roundup, 12/4/12: Lohaus rejected. So is GOP cliff proposal.

Tuesday, December 4th, 2012 by Joe Kristan

Iowa Department of Revenue blocks Lohaus shot at refund.  Ex-Iowa basketball star Brad Lohaus is remembered for, among other things, taking a ball in the face while guarding against an inbounds pass.  That feeling might have come back when Mr. Lohaus was recently denied a tax refund by the Department of Revenue.

According to a newly released letter denying a protest filed by Mr. Lohaus, he didn’t get around to filing Iowa income tax returns for 2001 through 2005 until July 2010.  The department of Revenue began collection action, including wage garnishment, in 2007.  The returns filed in 2010 showed some overpayments, but the Department denied refunds on the grounds that the statue of limitations had expired.   From the protest denial letter (my emphasis):

In their protest, taxpayers raise the following points to support their position.

1.  The Department did not notify them that there was a one-year statute of limitations at the time the wage garnishment began.

2.  Normal Iowa taxpayers have no way of knowing the rule of the one-year postdate matter with the Department disclosing the implication of the effects of lost payments.

3.  Taxpayers filed their returns in good faith that the Department would refund any overpayments of the garnished funds to them.

4. Due to the trust the taxpayers had in the State of Iowa together with personal circumstances, taxpayers are petitioning that the Department refund overpayment of $36,379.66 to them.

Pro tip: never trust the State.  Especially when the rules are on their side.  From the denial letter:

Telephone conversations with Mr. Lohaus show that he was repeatedly advised to file returns.  These returns were not filed with the Department until July 12, 2010. 

 Notification of the statute of limitations concerning Iowa income tax refunds is found in both Departmental rule 701 IAC 43.3 (8) and Iowa Code §422.73.  Both the Iowa Code and the Department’s administrative rules are published and available for public review.  Every citizen is presumed to know the law. 

The statute on refunds in Iowa reads:

A claim for refund or credit that has not been filed with the department within three years after the return upon which a refund or credit claimed became due, or within one year after the payment of the tax upon which a refund or credit is claimed was made, whichever time is the later, shall not be allowed by the director.

The taxpayer was eligible for amounts garnished within one year of the filing, but not older payments.

The moral?  File your returns, even if you have an overpayment.  If you let the statute of limitations expire, they get to keep it.  And they don’t have to warn you that they will.

 

TaxProf,   IRS Releases 159-Page Proposed Regs on New ObamaCare Medicare Taxes.  Just in time for me to teach them to the Iowa Bar tax school Thursday.  Thanks, IRS.

Paul Neiffer,  IRS Issues Proposed Regs on 3.8% Medicare Surtax

Anthony Nitti,   The Elf On A Shelf Will Haunt Your Kid’s Dreams, And More Thoughts On The Obamacare Investment Tax

 

White House rejects GOP fiscal cliff counteroffer (AP)

Wrong. They feel they need a distraction.  Democrats Needlessly Insisting on Rate Hikes (Martin Sullivan,  Tax.com)

Concern Trolling:  Why the Tea Party Is Bad for Conservative Tax Policy(Jeremy Scott, Tax.com).   When you see Todd Akin listed as a Tea Party candidate (he was more a creature of the social conservative wing of the GOP, not the Tea Party wing), somebody is being lazy.

Linda Beale,  Republican “fiscal cliff” proposal

 

Please please please:    Ohio Considers Changes to Complex Municipal Tax Codes(Julia Morriss, Tax Policy Blog)  If you have to have something as stupid as a municipal income tax, at least do it like Iowa, as an add-on to the state filing.

Please no!  It’s Beginning to Look a Lot Like… Tax Season (Trish McIntire)

Kay Bell,   Tax moves to make in December 2012

While doing their best to prevent them:  France Struggles to Tax Corporate Profits (Robert Goulder, Tax.com)

Actually, writing big checks can cause poverty, for those writing them.   There’s More To Fighting Poverty Than Writing Big Checks And Claiming Tax Deductions  (Janet Novack)

Robert D. Flach posted his Saturday Buzz right on time over  the weekend.  Catch it!

Maybe people could file forms reporting their fraud so they can measure it?  IRS Tax Fraud On The Rise But Actual Size Of Problem Hard To Pin Down: Report (Huffington Post)

Muskrats exempt from service on this jury.   Jury selection to begin in Beavers tax evasion trial

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Tax Roundup, 11/27/2012: Rocking Sheldon! And billionaires and millionaires

Tuesday, November 27th, 2012 by Joe Kristan

The Tax Update is in Sheldon, in the Northwest Iowa, helping out at the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School today.

Some of the happy practitioners at today’s Farm and Urban Tax School in Sheldon, Iowa.

Two schools are left: Red Oak and Ames.  Register today!

 

How easy is it for rich folks to avoid higher rates?  Florida Senator and potential presidential candidate Marco Rubio said that tax rate increases would be largely futile.  From Huffington Post:

WASHINGTON — Sen. Marco Rubio (R-Fla.) said Thursday there isn’t much point in raising tax rates on the wealthy, because they also have the money to hire people who will help them get out of paying taxes.

“The billionaires and millionaires that are going to be impacted by higher rates, they can afford to hire the best lawyers, lobbyists and accountants in America to figure out how not to pay those higher rates,” Rubio told National Journal’s Major Garrett at The Atlantic Washington Ideas Forum. “The people that are going to get stuck by that bill are the small businesses, the partnerships, the S corporations, that cannot hire the lawyers to get them out of it.”

Is it really possible for “billionaires and millionaires” to get out of taxes through the best efforts of their lawyers?  To some extent.  Greg Mankiw explains how Warren Buffett does it:

1. His company Berkshire Hathaway never pays a dividend but instead retains all earnings.  So the return on this investment is entirely in the form of capital gains.  By not paying dividends, he saves his investors (including himself) from having to immediately pay income tax on this income.

2. Mr Buffett is a long-term investor, so he rarely sells and realizes a capital gain.  His unrealized capital gains are untaxed.

3. He is giving away much of his wealth to charity.  He gets a deduction at the full market value of the stock he donates, most of which is unrealized (and therefore untaxed) capital gains.

All of these are useful only to people who don’t need their cash right away.  If you want to use your cash, these aren’t very useful.  And many of these items are fraught with danger for taxpayers with less pull than Warren.  For example, a closely-held C corporation that pays no dividends runs the risk of being hit with the Accumulated Earnings Tax.  Many other tax-sheltering opportunities have been shut down through various crackdowns on tax shelters over the years, like the passive loss rules.

The real futility of taxing the rich is that it does so little to address the government’s insolvency.  Letting the tax cuts for “the rich” expire only covers about $80 billion of the $1,200 billion annual budget deficit.  The big attempt to tax “the rich” is just a distraction; the rich guy isn’t buying.

 

Tax Prof Poll: Taxes and the Fiscal Cliff (TaxProf)

Joseph Henchman,   Chambliss, Others Distance Themselves from ATR Tax Pledge (Tax Policy Blog)

Patrick Temple-West,  Consensus on increasing tax revenue, a wide gulf on how to do it, and more (Tax Break)

Daniel Shaviro, Broadening the base versus raising the rate

 

I vote yes:  Can We Kill the Death Master File? (Russ Fox). The publication of dead folk’s Social Security numbers is a boon for identity thieves.

TaxGrrrl,  Tax Breaks For Medical Expenses Under ObamaCare.  Hint: they are fewer and smaller.

Paul Neiffer,  2012 May Be Last Year for Section 179 Flexibility.  “What many farmers do not know about is the ability to go back and amend their tax return to change their Section 179 deduction.”

Trish McIntire,  Document Your Holiday Giving.  If you give over $250, no receipt=no deduction.

William Perez,  Tax Tips for Charitable Giving During the Holidays

Anthony Nitti,  Could Tax Savings Expedite Free Agent Baseball Signings?

Jack Townsend,  Swiss Bank Pictet & Cie On DOJ Tax Radar Screen

Robert D. Flach didn’t let Thanksgiving weekend stop his Buzz!

Howard Gleckman, How Can 98 Percent of Us be Middle-Class? (TaxVox)

Angus Young (Wikipedia image)

Kay Bell, More Cyber Monday shoppers this year are paying state sales taxes

News you can use:  Tax Dodger Alert: Your Friend in the Senate (Robert Goulder, Tax.com)

Jeremy Scott,  Why the Finance Committee Needs Angus King. (Tax.com)  I prefer Angus Young.

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