Posts Tagged ‘Robert Wood’

Tax Roundup, 7/1/15: Trilobite deduction becomes extinct in Tax Court. And: Indiana throwback thrown out.

Wednesday, July 1st, 2015 by Joe Kristan

 

20150701-1The trilobites roamed the oceans for about 270 million yearsbut a charitable donation of fossils of these ancient arthropods failed to survive a single IRS exam. While scientists still ponder what may have caused these rulers of the seas to vanish, there is no doubt about what doomed the charitable deduction.

The fossils were donated by a California veterinarian, a Dr. Isaacs. He donated four fossilized trilobites to the California Academy of Sciences in 2006 and another 8 in 2007, claiming charitable deductions of $136,500 and $109,800.

When you donate appreciated long-term capital gain property to charity, you are allowed to deduct the fair market value of the property without ever including the appreciation in income — an excellent tax result. Because there is obvious abuse potential in this tax break, Congress has imposed strict valuation documentation rules on contributions of assets other than marketable securities if the claimed deduction exceeds $5,000. The Tax Court explains (citations omitted):

First, for all contributions of $250 or more, a taxpayer generally must obtain a contemporaneous written acknowledgment from the donee…

Second, for noncash contributions in excess of $500, a taxpayer must maintain reliable written records with respect to each donated item.

Third, for noncash contributions of property with a claimed value of $5,000 or more, a taxpayer must — in addition to satisfying both sets of requirements described above — obtain a “qualified appraisal” of the donated item(s) and attach to his tax return a fully completed appraisal summary on Form 8283.  Generally, an appraisal is “qualified” if it (1) is prepared no more than 60 days before the contribution date by a “qualified appraiser”, and (2) incorporates specified information, including a statement that the appraisal was prepared for income tax purposes, a description of the valuation method used to determine the contributed property’s fair market value, and a description of the specific basis for the valuation.

It’s not three strikes and you’re out; failing any of these requirement kills your deduction. Yet our veterinarian whiffed on all three requirements, according to the Tax Court. Regarding the appraisal, the court says:

Both of Dr. Isaacs’ Forms 8283 bear the signature “Jeffrey R. Marshall” in Part III, “Declaration of Appraiser”. Dr. Isaacs called Jeffrey Robert Marshall as a witness at trial. The Court accepted Mr. Marshall as an expert in the valuation of fossils over respondent’s objection.4

Mr. Marshall identified the signature on Dr. Isaacs’ 2006 Form 8283 as his own. He did not, however, recall signing it. He likewise identified his signature on Dr. Isaacs’ 2007 Form 8283 but could not recall signing the form.

Mr. Marshall similarly identified his signature on two letters, dated December 31, 2006 and 2007, that purported to be appraisals of the fossils Dr. Isaacs donated to CAS in 2006 and 2007. But Mr. Marshall did not write or even recognize the letters, and as Dr. Isaacs offered no testimony from any other expert as to the letters’ author, we did not admit them into evidence.

Courtesy the mad LOLscientist under Creative Commons license

Flickr image Courtesy the mad LOLscientist under Creative Commons license

It’s a bad sign when your appraiser denies doing an appraisal. I hope the appraisal fee wasn’t high.

Although he sought to introduce purported appraisals signed by Jeffrey Marshall, whom the Court accepted as an expert in fossil valuation, Mr. Marshall denied that he had written these purported appraisals, and we did not admit them into evidence. We need not decide whether Mr. Marshall was a “qualified appraiser” within the meaning of the regulations because, even if he was, Dr. Isaacs introduced no evidence that Mr. Marshall rendered any appraisals of the donated fossils for him. Dr. Isaacs offered no evidence of any other appraisals of the donated fossils that could satisfy the statutory requirement.

Even if the appraisals had been accepted, the Tax Court said the deduction failed for lack of a contemporaneous acknowledgement meeting tax law requirements (my emphasis):

Jean F. DeMouthe, on behalf of CAS, acknowledged Dr. Isaacs’ contributions in writing, and these letters, each dated for the date on which Dr. Isaacs made the contribution acknowledged therein, were contemporaneous as required by section 170(f)(8)(A) and (C). Under section 170(f)(8)(B)(ii), however, the letters could suffice as contemporaneous written acknowledgments only if they stated whether CAS had provided any goods or services in exchange. Neither letter includes such a statement.

Taxpayer loses.

The Moral? When deducting charitable donations, details matter a lot. If you give cash or property for which you will claim a deduction over $250, make sure the charity acknowledges the gift with the magic words saying no goods or services were received in exchange for the gift. And if you are donating property for a donation over $5,000, get your tax advisor involved early to make sure the paperwork and appraisals are done properly and your deductions don’t go the way of the trilobite.

Cite: IsaacsT.C. Memo 2015-121.

 

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Ben Bristor, Scott Drenkard, Indiana Tackles Throwback Rule and Personal Property Tax (Tax Policy Blog):

While Indiana has one of the lowest corporate tax burdens in the country, the throwback rule very frequently complicates corporate income taxation. In the process of trying to capture nowhere income, multiple states can claim the right to tax the same income, creating more complexity for tax authorities and businesses. By eliminating the rule, Indiana lawmakers have made a major improvement in the state’s tax treatment of corporations.

Good news for taxpayers with Indiana manufacturing operations.

 

David Brunori, Lessons on How Not to Run Your Government (Tax Analysts Blog):

A very knowledgeable person told me that Brownback set efforts to reduce taxes back 10 years. No one wants to be like Kansas. Liberals might celebrate that outcome — but folks who genuinely believe in more limited government and lower tax burdens will rue the Kansas experiment.

Why would you want to give more power to government when it can even screw up a tax cut?

 

Paul Neiffer, It Pays to Follow the Rules. “The bottom line is that sophisticated estate plans require taxpayers to follow the rules and as indicated by the Webber case, most of them fail at this and sometimes it can cost a lot of money (in Mr. Webber’s case the cost was close to $1 million).”

Robert Wood, Offshore Accounts? Choose OVDP Or Streamlined Despite FATCA

Russ Fox, Mr. Hyatt Goes to Washington…Again. “As you may remember, the Nevada Supreme Court ruled last September that the FTB committed fraud against Mr. Hyatt (false representation and intentional infliction of emotional distress), but threw out most of the Mr. Hyatt’s other claims.”

 

 

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Joseph Thorndike, Jeb Bush Takes a Page From Richard Nixon by Disclosing Personal Tax Returns (Tax Analysts Blog). “As Richard Nixon discovered 63 years ago, financial disclosure can be embarrassing but it’s also good politics.”

Richard Phillips, Chris Christie’s Long History of Opposition to Progressive Tax Policy. (Tax Justice Blog). Considering how high and awful taxes are in New Jersey, I would expect the Tax Justice people to like him more.

Tony Nitti, Expiration Of Bush Tax Cuts Cost Jeb Bush $500,000 In 2013

Kay Bell, Which candidate’s tax return do you most want to see?

 

Len Burman, The Uneasy Case for a Financial Transaction Tax (TaxVox). When finance markets are global, these taxes are a great way to run financial businesses out while collecting very little tax. Still, Mr. Burman musters faint praise: “An FTT is far from an ideal tax. But compared with other plausible ways of raising new revenue, it doesn’t look so bad.”

TaxProf, The IRS Scandal, Day 783

 

News from the Profession. Accounting Professor Who Specialized in Ethics Cheated on Lots of His Papers (Caleb Newquist, Going Concern). I wonder if this is the inventor of the take-home ethics exam.

 

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Tax Roundup, 6/30/15: It’s FBAR Day! Foreign and gaming account owners, do or die.

Tuesday, June 30th, 2015 by Joe Kristan

 

fincen logoForm 114 or bust. Today is the unextendable deadline to file Form 114, the “FBAR” report of foreign financial accounts. It’s required if you own foreign financial accounts whose value reached $10,000 anytime in 2014. Penalties for failing to file can run to half the value of the account, so if it applies, you want to get it done. The form must be filed electronically.

Foreign financial accounts include bank or brokerage accounts held outside, even in an offshore branch of a U.S. bank. They also include online gaming accounts for sites located outside the U.S. More details on what is included is available at the IRS FBAR page.

You will need the mailing address of the branch where your foreign account is located. Russ Fox has done a great job of finding many street addresses for online gaming sites.

Is the Form 114 filing requirement absurd? Yes. The filing threshold is far too low, and it works to make regulatory violators out of Americans living and working overseas for the crime of committing personal finance abroad. Meanwhile, I would be surprised if any actual criminals are actually caught using Form 114; instead, it’s just used to increase penalties on those whose tax violations are found in other ways. Oh, and to extort money out of people who didn’t realize they were supposed to file the thing. Unfortunately, absurdity is what the IRS is all about.

Speaking of absurd, The Commerce Department BE-10 survey for those owning at least 10% of an offshore business is also due for e-filing today, with penalties into the thousands of dollars for non-filers.

Related: Russ Fox, Does a Nonresident Alien Spouse that Has Elected to be Treated as a US Person Need to File an FBAR?

 

Arnold Kling reports on what seems to me a very unwise idea: State Nullification of the Federal Income Tax?, involving the idea of “nullifying” the federal income tax by providing a state credit for whatever the federal income tax is, funded by state sales taxes. Arnold points out some of the obvious problems: “For example, if this were enacted, then residents would have no incentive to minimize their tax liability. Go ahead and realize all of your capital gains, because when you pay more Federal taxes, your state sends you a credit.”

 

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Forest fires in Canada give Iowa a spooky sky today.

 

William Perez, Tax Implications of Supreme Court’s Same-Sex Marriage Ruling. “Together, [Jason] Dinesen and I came up with a list of all the tax things we should be concerned about as a result of the Supreme Court’s decision in Obergefell v. Hodges (pdf).”

Robert D. Flach brings his Tuesday Buzz, along with the less cheerful news that his Gmail account has been compromised. He ponders whether IRS Commissioner Koskinen is worse than his predecessor, Worst Commissioner Ever Shulman. I still give the prize to Shulman, but Koskinen is making a heck of a case for the honor.

Kay Bell, IRS ‘incompetence’ blamed for lost Lois Lerner emails. That’s certainly plausible, but the incompetence all seems to be on the side of hampering the investigation.

Robert Wood, If Uber, FedEx, Other Workers Are Employees, Who Pays What?

Joni Larson, Failing to Prove the Attorney-Client Privilege Applies (Procedurally Taxing). Some conversations you’d rather not share with the IRS.

Peter Reilly, Mario Biaggi’s Criminal Case Followed By Tax Travails. In some ways the tax decision coming on top of the criminal conviction really makes me think there might have been something to Biaggi’s contention that he was a victim of Giuliani’s ambition.  When you look at the big picture of the transactions, nobody seems to have been getting away with anything from an income tax perspective.”

Jason Dinesen, From the Archives: Are Donations to a 501(c)(4) Deductible?

 

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Elizabeth Malm, A Quick Primer on Personal Income Taxes (with GIFs!) (Tax Policy Blog). They’re nice, but no dancing cats. A great little post for anybody wanting an overview of state income taxes.

Gene Steuerle, Combined Tax Rates and Creating a 21st Century Social Welfare Budget (TaxVox).

Dalton Lane, Obergefell v. Hodges: Supreme Court Upholds Same-Sex Marriage (Tax Policy Blog):

The Supreme Court’s ruling has definitely simplified the tax system. Whether a same-sex marriage, or a opposite-sex marriage, the tax treatment is the same. Furthermore, same-sex couples will no longer have any difference in filing status between their state income taxes and federal income taxes.

It will make Jason Dinesen’s life easier, for sure.

Caleb Newquist, PwC Walks a Fine Line Between Its People and Clients on Same-Sex Marriage (Going Concern).

TaxProf, The IRS Scandal, Day 782

 

TaxGrrrl, 8 Signs That It’s Time To Get A New Tax Professional. They are all good signs, especially number 8.

 

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Tax Roundup, 6/24/15: New obscure dumb forms we choose to do together. And: Wine and Taxes!

Wednesday, June 24th, 2015 by Joe Kristan

20150528-1There’s a new stupid form in town. The Commerce Department this year springs a new form on people with interests in foreign businesses. Form BE-10 was originally due May 31, but the system for filing it crashed, leading to a new June 30 deadline.

BE-10 is a survey, not a tax form. The survey is done every five years, and formerly was required only when you were contacted by the Commerce Department. Now everyone with a 10% or more “direct or indirect” interest in a foreign business is supposed to file it. From Accounting Today:

The form is mainly intended for businesses with foreign investments. Originally individuals only had a filing requirement if they were directly contacted by the bureau, but last November, the government amended its regulations to require any U.S. person who had at least a 10 percent direct or indirect interest in a foreign business enterprise at any time during the U.S. person’s fiscal year to file the Form BE-10. A U.S. person includes individuals, trusts, estates, corporations and partnerships.

“With many of our clients fighting the IRS over FBAR penalties, we err on the side of filing whenever the government requests a U.S. person to file an international information report,” said Carolyn Turnbull, international tax services director at Vestal & Wiler CPAs in Orlando, Fla.

Penalties for failure to file the form range from $2,500 to $25,000. Even worse, individuals who willfully fail to file the form can face fines of up to $10,000 or imprisonment for a maximum of one year, or both.

$2,500 to $25,000 for not filling out a stupid survey. Remember, government is simply a word for the things we decide to do together, like clobber each other with big fines for obscure paperwork violations.

Robert Wood has more.

 

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Kay Bell, Uncle Sam demands foreign bank account filing by June 30. The $10,000 threshold — and the whole FBAR regime, in fact — is absurd. Like so many regulations, it ensnares otherwise innocent people for paperwork violations while doing next to nothing to affect criminals, who don’t much care about getting the paperwork right.

Robert Wood, Offshore Banks Reveal Account Data, As IRS Amnesty For Many Involves 50% Penalty. Some amnesty.

Russ Fox, FBAR Due in One Week:

Because of the Hom decision of last year, we now must again report foreign online gambling accounts. That’s basically all online gambling sites except the legal sites in Delaware, Nevada, and New Jersey. I maintain a list of online gambling sites and their mailing addresses here.

Russ performs a valuable public service with this address list.

 

 

Samantha Jordan, Scott Drenkard, How High are Wine Taxes in Your State? (Tax Policy Blog). In Iowa, pretty dang high:
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Considering it’s burgeoning wine industry, it’s surprising that there hasn’t been more effort to bring Iowa’s wine tax down. And some of the new Iowa wine isn’t half bad.

 

Jason Dinesen, Marriage in the Tax Code, Part 11: Meet the “Single Penalty”

Peter Reilly, Chief Counsel Gives Narrow Scope To Partnership Liability Regulations. “Note, here, that the taxpayers were insolvent and the field is being told to look harder for a possibly larger assessment.”

Tony Nitti, Tax Geek Tuesday: Navigating The Multiple Definitions Of Nonrecourse And Recourse Liabilities

 

Carl Smith, Does Rev. Proc. 99-21 Validly Restrict Proof of Financial Disability, for Purposes of Extending the Refund Claim SOL, to Letters From Doctors of Medicine or Osteopathy? Part 1.

TaxGrrrl, Nevada Pops New Tax On Burning Man, iHeartRadio, Other Music Festivals

 

David Brunori, Rand Paul’s Tax Ideas Are Worth Serious Consideration (Tax Analysts Blog). 

Sen. Rand Paul, R-Ky., a GOP presidential candidate, released his tax plan last week. As expected, some commentators piled on criticism. Howard Gleckman of the Urban Institute said Paul was trying to use the tax proposal to “fundamentally restructure the federal government as we know it.” Bob McIntyre, the director of Citizens for Tax Justice, said Paul’s plan would cost $15 trillion over 10 years. Other, less informed folks resorted to calling Paul names.

This criticism from liberals is neither unexpected nor irrational. These are folks who like to see more government spending and revenue raising. Paul is a small government Republican. Of course he wants to see less government and taxes. So it’s not surprising that his tax plan would, in a vacuum, lose the government money. The Tax Foundation says the cost would be $3 trillion over 10 years on a static basis. But that assumes Paul will keep spending at current levels. I suspect that if he became president, he’d support spending cuts equal to or greater than the cost of his tax plan.

I certainly would.

 

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Howard Gleckman, CBO Has No Idea What Repeal of the ACA Means for the Economy or the Deficit (TaxVox). No more idea than when they said the ACA wouldn’t increase the deficit back when it was enacted.

 

Ethan Greene, Alaska Ends Film Tax Credit Program (Tax Policy Blog). States are beginning to realize that they are being had by the film industry.

TaxProf, The IRS Scandal, Day 776:

In the continuing saga of the IRS, the Department of Justice, and their efforts to hide evidence and obstruct justice to protect Lois Lerner and the administration’s targeting of its political opposition, the IRS now claims that thousands of emails found on backup tapes Commissioner Koskinen told Congress did not exist are not IRS records, the IRS has no control over them, and they can’t produce them. 

The IRS has done nothing but obstruct and stonewall. If a taxpayer treated an IRS exam the way the IRS has treated this investigation, they’d be inviting the criminal agents in.

 

News from the Profession. Life at Deloitte Includes Slow Days (Caleb Newquist, Going Concern).

 

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Tax Roundup, 6/23/15: A foolproof tax prep scam! And more.

Tuesday, June 23rd, 2015 by Joe Kristan

One week left! To file your FBAR Form 114 reports of foreign financial accounts.

 

ice truckDid a Davenport preparer e-file different returns than he showed his clients? That’s what federal prosecutors allege. They have accused a Davenport man of preparing accurate tax returns for clients, but then e-filing different returns claiming larger refunds, diverting the extra refunds to his own account.

If true, the case is interesting in two ways.

First,It appears to have been based on fraudulent Schedule C sole proprietorship filings. These can be used to create sham losses to create extra refunds, or to create sham earned income to generate earned income tax credit. It was most likely an EITC scam, as fake schedule A deductions work as well for deductions, but not at all for generating refundable EITC.

Second, it was a horrible idea. It’s hard to imagine how he thought he would ever get away with filing returns different from what the client approved. Inevitably there would be a notice or other problem that would bring the scam to light. But the cops don’t spend their days chasing geniuses.

 

Robert Wood, Record 27 Years Prison For Tax Fraud, Beating Tax Fraud Queen’s 21 Years. The guy allegedly collected 7,000 Social Security numbers and scammed $1.8 in stolen refunds. Considering the hassle he created for the rightful holders of those numbers, that sounds about right.

buzz20141017Robert D. Flach has Tuesday Buzz for you, covering the ground from Trump to Kansas.

William Perez, Tax Advice for Cannabis Entrepreneurs. Speaking of buzz.

Hank Stern, CO-OPs: That flushing sound you hear…  It appears that other Obamacare health co-ops may go the way of Iowa’s CoOportunity.

Keith Fogg, Contrasting the Compromise Standards between the Chief Counsel, IRS and the Department of Justice in Litigated Cases (Procedurally Taxing)

Jack Townsend, Two More Swiss Banks Enter DPAs under US DOJ Swiss Bank Program. Swiss bank privacy is over. Taxpayers who have been counting on it need to check in with their attorneys.

 

Jeremy Scott, Supreme Court Could Create $353 Billion Deficit Problem (Tax Analysits Blog):

The wait continues for the Supreme Court’s decision in King v. Burwell — the Court did not release the opinion on June 22. If the Court decides in favor of King — basically making residents of 34 states ineligible for healthcare credits — that will gut President Obama’s healthcare reform effort, essentially leaving lawmakers with the choice to either fix or repeal the Affordable Care Act. Republicans are eager to do the latter, but the Congressional Budget Office may have made that more difficult. The CBO says that outright repeal would cost $353 billion over 10 years based on a static scoring model.

It’s a bit strange to think that it’s the Republicans’ responsibility to fix a law that was incompetently drafted by a Democratic Congress. And the House and Senate don’t seem inclined to follow that path anyway. 

It’s not the Supreme Court that would create the problem. It would be the administration and its Congressional allies that passed an unworkable and incoherent lawwith no support at all from the other party.

Kay Bell, No Supreme Court word yet on Obamacare subsidies,
but another part of the health care law is closer to repeal
. “The House voted on June 18 to get rid of the medical device tax.”

 

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Dita Aisyah, Tax Extenders: Take Them or Leave Them, Part 2 (Tax Policy Blog):

Currently, all 50 or so tax extenders are expired for 2015, but Congress will likely pass them retroactively as they have in the past.

Some tax extenders are genuinely good policy, while some are bad. However, the concept of an extender is silly. They create unnecessary uncertainty for individuals and businesses who need to make important long term financial plans.

This very uncertainty creates the need for lobbyists to make annual pilgrimages to Congress to beg for another year of tax breaks. I suspect that Congress likes it that way.

 

Kyle Pomerleau, Senator Rand Paul’s Payroll Tax Swap. “One striking feature of the tax plan is that it eliminates payroll taxes.”

Bob McIntyre, Detractor Dangles Shiny Objects to Obscure Facts about Rand Paul’s Deficit-Inflating Flat Tax Proposal. (Tax Justice Blog). A left-wing tax site calls the Tax Foundation right-wing.

Steven Rosenthal, The Rich get Richer, with a Little Tax Help (TaxVox).

TaxProf, The IRS Scandal, Day 775. Today’s entry covers a non Tea Party organization whose exemption was stalled because it held views disapproved by the Administration.

 

News from the Profession. There’s a Lack of Talent to Succeed Accounting Firms Because the Talent Doesn’t Exist (Caleb Newquist, Going Concern). “A recent survey of accounting firm partners from the CPA Consultants’ Alliance found that over half of respondents (51.7%) said procrastination or denial was a primary cause for firms’ succession troubles.”

 

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Tax Roundup, 6/18/15: Bill protecting multi-state employees advances. Also: crowdfunding taxes, poker reporting and lots more!

Thursday, June 18th, 2015 by Joe Kristan

 

Programming Note: No Tax Roundup tomorrow. See you Monday!

 

20140923-1The House Judiciary Committee advanced three bills: The Digital Goods and Services Tax Fairness Act (H.R. 1643), The Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315), and The Business Activity Tax Simplification Act (H.R. 2584).  Joseph Henchman provides some explanation in Activity in Congress on Key State Tax Bills (Tax Policy Blog):

The Mobile Workforce State Income Tax Simplification Act of 2015 (H.R. 2315) limits states from imposing or collecting individual income tax on those who are in the state for less than 30 days. Most states technically require such payments when someone is in the state for even a day, and even withholding to be set up in advance, and we’re increasingly hearing horror stories of states trying to collect these sums. Since all states provide a credit for taxes paid to another state, making people fill out 20 or 30 tax returns for a net national wash is lunacy. Most everyone, except New York officials and state tax administrators, support this legislation…

The Digital Goods and Services Tax Fairness Act (H.R. 1643) establishes national standards for when and how states can tax digital goods and services…

The Business Activity Tax Simplification Act (H.R. 2584) limits state power to impose corporate income taxes and gross receipts taxes to businesses with physical presence in the state for at least 14 days. While that is the historical standard, states have begun shifting to an “economic nexus” standard, imposing taxes on businesses with no connection to the state except that they have sales there. This exporting of tax burdens adds complexity, litigation, compliance costs, and uncertainty. We hear lots of horror stories of states suddenly imposing years’ of back taxes on companies who had no expectation of owing taxes in that state because they have no property or employees there.

Iowa is among the states aggressively going after out-of-state businesses with very weak ties to the state.

The Digital Goods act seems the least controversial, so the most likely to advance. The Mobile Workforce bill — a long overdue effort to save cross-state workers from expensive annual compliance nightmares — passed 23-4, opposed only by three New Yorkers and a Californian. That’s a sign that it could advance. The Business Activity Simplification Act passed only on a party-line vote, which means it is likely doomed for this session of Congress.

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Jason Dinesen, Same-sex Marriage and Paycheck Withholdings – An Unpleasant Surprise on 2014 Tax Returns. “Some of my clients went from getting a refund of several-thousand dollars in prior years to owing several-thousand dollars on their 2014 tax return.”

TaxGrrrl, Crowdfunding As An Investment Tool: Is Trouble Brewing? If the proceeds are a “gift,” they are non-taxable, but it’s not clear that they qualify.

Robert Wood, Amazingly, IRS Collects 30 Year Old Tax Debt Despite 3 Year Statute Of Limitations. This shows how hard it is to shake off liability for unpaid payroll taxes. It reminds us how unwise it is to “borrow” withheld taxes from the IRS.

Russ Fox, Form 8300 and Poker:  “If you’re a business and you receive a payment of $10,000 or more in cash or like funds (this would include casino chips but would not include a cashier’s check), you have a reporting requirement: You must file Form 8300 with the IRS.”

Kay Bell, IRS looks at $600 slots, bingo & keno reporting threshold

Jack Townsend, On Ignorance – Deliberate or Otherwise. Sometimes, when telling clients that they did something that will cost them taxes, I have gotten the feeling the client wished I was a little more ignorant.

Mitch Maahs, National Society of Accountants Proposes a Tax Practitioners Bill of Rights (Davis Brown Tax Law Blog). “While this Bill of Rights would represent a vast improvement for tax practitioners and their clients, the gravity of these improvements in customer service, combined with the crippling level of IRS budget cuts, may render the Tax Practitioners Bill of Rights an unattainable goal.”

 

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Joseph Thorndike, First They Taxed Soda; Now They’re Coming for Your Water (Tax Analysts Blog). First they tax pop, and now they want to discourage a healthy and convenient alternative to sugary drinks. What they really want is more money and more power over the people foolish enough to keep electing them.

TaxProf, The IRS Scandal, Day 77. E-mail stalling figures prominently.

That can’t be true. It was the “Affordable” Care Act. Five Years Later: ACA’s Branded Prescription Drug Fee May Have Contributed to Rising Drug Prices (Scott Greenberg, Tax Policy Blog).

Renu Zaretsky, On Havens and Stalemates. Today’s TaxVox talks about Wal-Mart’s tax structure, an EU tax haven “blacklist,” and a TIGTA report on how budget cuts are affecting IRS enforcement efforts. Also, a lame employment tax credit plan from Hilary Clinton.

 

Career Corner. Donald Trump’s Accountants Should Quit (Caleb Newquist, Going Concern)

It’s a good day.

 

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Tax Roundup, 6/17/15: Revenues: every business should have them! And: tax abuse of accidental Americans.

Wednesday, June 17th, 2015 by Joe Kristan

 

dontwalk4A picture of a bad deduction. Early in my career a practitioner confided to me that every 1040 should have a Schedule C, the 1040 report of business income, so that taxpayers could write-off personal expenses. That’s never been the actual tax law, but too many taxpayers believe otherwise.

The actual tax law is that you can’t deduct as business expenses costs without an intent to actually make money. Iowa has been independently enforcing this rule, known informally as the “hobby loss” rule. A newly-released protest resolution has an example of a Schedule C business that may not have been conducted with adequate vigor:

The Business Activity Questionnaire you completed indicated that you spent 8-10 hours per year on the business. That is less than one hour per month. This hardly seems reasonable to have for a successful business. An average photoshoot can last longer than 1 hour including let up and tear down and then most photographers spend additional time editing or developing the photos.

What made the state suspicious? From the protest response (my emphasis)

There is no evidence that the taxpayer has ever been successful in this business. With the exception of 2014, there is no record indicating that you filed a sales tax return or a schedule C showing any receipts since your permit was issued. 

One of the most important parts of a real business is revenue. You could look it up. If you have none, it may be hard to convince the revenue agent you are serious.

You receive some income from other sources, and the losses you report from this activity does lower your income, in some years enough to make you exempt from tax. 

That can be a clincher. If you have “business losses” that never end, but they save you taxes on other income, that’s a likely sign that your real “business” is reducing your taxes.

Cite: Iowa Document Reference 15201018

 

20140815-2William Perez, People Unaware of Their American Citizenship are Being Fined for Not Filing US Tax Returns:

“[The] typical [client I’m] seeing now,” reveals Virginia LaTorre Jeker, a tax attorney in Dubai, is “someone who [was] either born in the US and left as young child, or who has [an] American parent from whom they have acquired citizenship.

The individual will always have another nationality, typically from a Middle Eastern country which they consider as their true home. Most times, these individuals will never have filed a US tax return since they were unaware they had any US tax obligations.”

If you think this sounds insane, you are right. No other country does anything like this.

Robert Wood, FBARs For Foreign Accounts Are Due June 30. Should You File For The First Time? “You don’t want to ignore a filing obligation now that you know about FBARs. But one should consider where you are going long term with your issues, how quickly you plan to act, and whether you have good and accurate information to file now.”

 

Kay Bell, U.K. pays a record amount for tax cheat tips

Jim Maule, How Does a Politician Fix a Tax Law The Politician Doesn’t Understand? Well, they’re obviously perfectly willing to enact tax laws they don’t understand in the first place. Yet for all the demonstrated incompetence of politicians, Prof. Maule wants to put more things under their control.

TaxGrrrl, Banks Quick To Turn Over ‘Abandoned’ Assets To Revenue-Hungry States:

Originally accounts were typically considered abandoned only if they went untouched for decades. But revenue-hungry states have been dramatically shortening that “dormancy” period to get their hands on this booty. 

Because the state politicians want the money don’t trust the private sector to take care of their customers, and they are looking out for you!

Peter Reilly, Campaigning For Bishopric Not A Valid Exempt Purpose – Kent Hovind Update. It’s not? I guess I can skip my mitre-measuring session.

 

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Robert D. Flach, FOUR REASONS TO REMOVE THE EITC FROM THE TAX CODE: “Probably the most important reason – Tax credits, especially refundable credits, are a magnet for tax fraud.” That’s exactly right.

Rachel Rubenstein, Reflections on the General State of Tax-related Identity Theft (Procedurally Taxing). “From 2004 to 2013, the NTA identified tax-related identity theft as one of the “‘Most Serious Problems” faced by taxpayers in nearly every annual report submitted to Congress here.”

David Brunori, The Revolt of the Corporations (Tax Analysts Blog). “The message is clear: Businesses have options and will move to sunnier tax climates.”

Howard Gleckman, The House GOP’s Internal Battle Over Online Sales Taxes (TaxVox).

Tony Nitti, Donald Trump Announces Bid For Presidency: What Is His Tax Plan? And who cares?

 

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Alan Cole, IGM Panel: Real Income Growth is Understated (Tax Policy Blog):

The IGM Forum, a University of Chicago project that surveys academic economists on issues, last month found that economists broadly agree that real median income numbers understate real growth in standards of living.

I think that has to be true. Don Boudreaux likes to compare items in old Sears catalogs with their modern counterparts to show how much better — and cheaper, in terms of hours of work needed to pay for them — the modern goods are:

The list is long of consumer goods that ordinary Americans today can easily afford but that were unavailable commercially to even the wealthiest Americans in the 1950s. This list includes digital cameras, lightweight waterproof sportswear, high-definition televisions, recorded Hollywood movies to play at home, MP3 players, personal computers, cellphones, soft contact lenses, and GPS devices.

We take for granted everyday things, like the internet, flight, automobiles, paved roads between cities, that the richest men of 200 years ago did without.

 

TaxProf, The IRS Scandal, Day 769

News from the Profession. Counteroffers Rarely Work for Employees Jumping Ship (Caleb Newquist, Going Concern).

 

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Tax Roundup, 6/16/15: Extreme tax preparer business development tactic fails. And: Florida man, meet Tax Whiz.

Tuesday, June 16th, 2015 by Joe Kristan

 

lizard20140826Sadly, there’s plenty of tax work to go around. But not enough for Maria Colvard of Chambersburg, Pennsylvania, it seems. The operator of Tax Max LLC, a tax prep service, Ms. Chambers appears to taken competition to a new level. From a Department of Justice press release (my emphasis):

According to U.S. Attorney Peter Smith, between February and May 2013, Colvard convinced an employee at Tax Max LLC, a tax preparation service owned by Colvard in Chambersburg and Hanover, Pennsylvania, to claim to be a criminal investigator with the Internal Revenue Service to shut down the rival business, known as Christina’s Tax Service, also located in Chambersburg.  The employee, Merarys Paulino, then claimed to be an IRS agent and demanded money from Christina’s Tax Service as well as its client list. Paulino previously entered a guilty plea to impersonating an IRS agent and cooperated in the prosecution of Colvard.

It’s foolproof! What could go wrong? Well, other than that a tax professional would be the least likely person in the world to believe an IRS criminal investigator would just show up without a written notice and demand cash and a client list on the spot. In Pennsylvania, as in Iowa, law enforcement folks don’t spend their days chasing geniuses.

Ms. Colvard was convicted of two counts of extortion and one count of “aiding the impersonation of an employee of the United States” after a four-day trial.

 

Jason Dinesen, Choosing a Business Entity: Basic Terminology

Robert Wood, FedEx Settles Independent Contractor Mislabeling Case For $228 Million

Hank Stern, On “Losing” Subsidies. “The fact of the matter is, should SCOTUS insist that the law be applied as it was written, then folks in states using the 404Care.gov site were never eligible to receive subsidies in the first place.”

Peter Reilly, Exchange Facilitator Does Not Beat Missouri Use Tax On Learjet. “What they learned was that a transaction that qualifies for tax deferral under federal tax principles does not necessarily avoid sales and use tax.”

Kathryn Sedo, Counsel for Ibrahim Explain Last Week’s Important Circuit Court Opinion on Filing Status (Procedurally Taxing). “The question before the 8th Circuit in Isaak Ibrahim v. Commissioner was whether the term ‘separate return’ as used in section 6013(b) is defined as return with the filing status ‘married, filing separately’ or a tax return with any other filing status other than ‘married, filing jointly.'”

Kay Bell, Houston, we could have more flood problems. “OK, how did I wake up today in my Austin house but in South Florida?”

 

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Greg Mankiw, considering arguments made by Export-Import Bank supporters, says:

Other countries give similar subsidies to their firms. So what? If other nations engage in corporate welfare, that is no reason for the United States to follow suit in the name of a level playing field.  We don’t need to import other nations’ bad policies.

Substitute “states” for “countries” and “nations” and it is an accurate summary of the foolishness of the state tax credit “incentive” game played by Iowa economic development officials and politicians.

Jeremy Scott, Can the United States Kill BEPS? (Tax Analysts Blog). ” The United States will probably never go along with BEPS the way the rest of the world has gone along with FATCA, but in the end that probably won’t matter. The EU, India, and China will be perfectly happy to find a way to preserve their tax base without U.S. help.”  “BEPS,” by the way, stands for “Base erosion and profit shifting,” the predictable and natural response of taxpayers to pocket-picking tax authorities.

Kayla Kitson, Four Reasons to Expand and Reform the Earned Income Tax Credit (Tax Justice Blog). I don’t buy it. With 25% of its cost going to ineligible people — and no small part of that to thieves — it is at best very inefficient. The post doesn’t even mention the poverty trap created by the way the credit phases out as incomes rise.

TaxProf, The IRS Scandal, Day 768. “The court filing, provided to The Daily Caller, claims the IRS received new Lerner emails from the Treasury Department’s inspector general (TIGTA) but can’t fork over the emails to Judicial Watch, a nonprofit group suing to get the emails. Why? Because the IRS is busy making sure that none of the emails are duplicates  – you know, so as not to waste anyone’s time.”

Renu Zaretsky, Raising or Cutting Taxes: Go Big or Go Home. Today’s TaxVox headline roundup covers presidential candidate tax pledges, as well as tax developments in Kansas, Texas, Florida, New Mexico and Massachusetts.

 

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Florida man meets Tax Whiz. A Florida man filed a tax return prepared by the “Tax Whiz” claiming the American Opportunity Tax Credit. The result was a $1,853 overpayment that the IRS applied to outstanding child support liabilities. The IRS later determined that he didn’t qualify for the credit because he had no qualifying educational expenses. The IRS wanted its $1,843 back.

The man argued that Tax Whiz claimed the credit unbeknownst to him, so he shouldn’t have to pay it back. The Tax Court wasn’t buying:

By his own admission petitioner did not review the return in question. Reliance on a tax return preparer cannot absolve a taxpayer from the responsibility to file an accurate return. See Metra Chem Corp. v. Commissioner, 88 T.C. 654, 662 (1987) (“As a general rule, the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer.”). Even if Tax Whiz may have claimed the credit without his knowledge, petitioner is still responsible for the resulting deficiency.

The moral? Not a surprising result.  You are responsible for what goes on your return, no matter how much, or how little, you pay your preparer. More surprising is that the taxpayer’s first and middle name is listed as “William Billy.”  I’ve never seen that one.

Cite: Devy, T.C. Memo 2015-110.

 

 

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Tax Roundup, 6/15/15: IRS declines to make estate tax easy for surviving spouses. And: New ID theft measures!

Monday, June 15th, 2015 by Joe Kristan

Due Today: Second Quarter estimated tax payments; returns for U.S. citizens living abroad.

 

Funeral home signIRS declines to make the estate tax portability election easy. There’s no such thing as a joint estate tax return. That means if one spouse has all of the assets, the other spouse’s lifetime estate tax exemption — $5,430,000 for 2015 deaths — can be lost.

Congress changed the tax law to allow a surviving spouse to inherit the deceased spouse’s unused estate tax exemption, for use on when the surviving spouse files an estate tax return. unfortunately, this treatment is not automatic. It is only available if a Form 706 estate tax return is filed for the first spouse to die. The IRS on Friday issued final regulations rejecting any short-cuts in this process.

There are many problems with this approach. The most obvious is the lottery winner problem. A couple might be living in a trailer, and when the first spouse dies, there seems to be no point in filing an estate tax return when their combined assets are a small fraction of the amount triggering estate tax. Then the surviving spouse wins the Powerball, and suddenly the first spouse’s estate tax exemption becomes very valuable — but it’s lost, because no return was filed.

The IRS rejected allowing any pro-forma or short-cut estate tax returns for such situations:

The Treasury Department and the IRS have concluded that, on balance, a timely filed, complete, and properly prepared estate tax return affords the most efficient and administrable method of obtaining the information necessary to compute and verify the DSUE amount, and the alleged benefits to taxpayers from an abbreviated form is far outweighed by the anticipated administrative difficulties in administering the estate tax. In

The IRS did say it would be generous in allowing “Section 9100″ late-filing relief for taxpayers who die with assets below the exclusion amount, but they did not provide any sort of automatic election. The result is a trap for the unwary executors of small estates.

Cite: TD 9725

 

20130419-1IRS announces ID-theft refund fraud measuresThe IRS last week announced (IR-2015-87) steps it promised in March to fight refund fraud in cooperation with tax preparers and software makers:

The agreement — reached after the project was originally announced March 19 — includes identifying new steps to validate taxpayer and tax return information at the time of filing. The effort will increase information sharing between industry and governments. There will be standardized sharing of suspected identity fraud information and analytics from the tax industry to identify fraud schemes and locate indicators of fraud patterns. And there will be continued collaborative efforts going forward.

The most promising of the steps:

Taxpayer authentication. The industry and government groups identified numerous new data elements that can be shared at the time of filing to help authenticate a taxpayer and detect identity theft refund fraud. The data will be submitted to the IRS and states with the tax return transmission for the 2016 filing season. Some of these issues include, but are not limited to:

-Reviewing the transmission of the tax return, including the improper and or repetitive use of Internet Protocol numbers, the Internet ‘address’ from which the return is originating.

-Reviewing computer device identification data tied to the return’s origin.

-Reviewing the time it takes to complete a tax return, so computer mechanized fraud can be detected.

-Capturing metadata in the computer transaction that will allow review for identity theft related fraud.

These are important because they might actually prevent fraudulent refunds from being issued. Measures to help identify fraud after it happens don’t do much, especially when the fraud occurs abroad. Catching the fraudulent returns before the refunds are issued is the only way to really deal with the problem, and the only way to keep innocent taxpayers whose identification has been stolen from having to go through the annoying and sometimes lengthy process of recovering their overpayments.

The sad thing – I see nothing here that couldn’t have been done five years ago, when ID theft refund fraud was already becoming a problem. But the Worst Commissioner Ever was too busy trying to impose preparer regulations on behalf of the big franchise tax prep outfits to pay attention. Priorities.

 

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Bob Vineyard, Best Kept Secrets About Obamacare (Insureblog). “About half of those living in Kentucky and classified as poor were not aware of the basics of Obamacare.”

TaxGrrrl, Spain’s King Felipe Strips Sister Of Royal Title As Tax Evasion Charges Proceed. What good is being regal if things like this happen?

Annette Nellen, Tax reform for 2015? Seems unlikely

Kay Bell, Lessons learned from being tax Peeping Toms

Jason Dinesen, Marriage in the Tax Code, Part 10: Filing Statuses Arrive in 1948

Peter Reilly, Why Is Multi-State Tax Compliance So Hard? “Don’t get me wrong.  I believe that the prudent thing is to try to be in pretty good, if not perfect, compliance.  Just don’t expect anybody to make it really easy any time soon.”

Robert Wood, Beware Tax Cops At Farmers’ Markets

 

20120816-1Joseph Henchman, State of the States: Special Session Edition and Kansas Approves Tax Increase Package, Likely Will Be Back for More (Tax Policy Blog). Mr. Henchman rounds up end-of-session tax moves from around the country. Kansas may have made the biggest changes, including a small retreat from its exemption of pass-throughs from the income tax:

Kansas in 2012 completely exempted the income from such individuals, who now total over 330,000 exempt entities. Efforts to repeal this unusual and non-neutral total exclusion of pass-through income earned a veto threat from Governor Brownback. The guaranteed payments provision is estimated to generate approximately $20 million per year.

Taxing guaranteed payments will hardly plug the fiscal hole created by the blanket pass-through exemption. Joseph concludes: “But overall, it is a grab bag of ideas that does little to address the problems underlying Kansas’s tax and budgetary instability. Absent more fundamental changes, legislators will likely have to return in coming years to address budget gaps.”

 

Norton Francis, How Would the Kansas Senate Close the State’s Budget Gap? Mostly by Taxing Poor People (TaxVox)

 

TaxProf, The IRS Scandal, Day 765The IRS Scandal, Day 766The IRS Scandal, Day 767

 

Career Corner. Reminder: Parents Meddling in Your Careers Will Not Help You (Caleb Newquist, Going Concern)

 

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Tax Roundup, 6/5/15: Iowa adds deductions to 1041s. And: the dangers of unmonitored payroll services.

Friday, June 5th, 2015 by Joe Kristan

20130117-1Federal 706 costs good for Iowa 1041. The Iowa General Assembly yesterday eased restrictions on administrative deductions for fiduciaries. Iowa uses federal taxable income, with modifications, as its tax bases. Both houses passed HF 661, which provides a modification to this tax base:

On the Iowa fiduciary income tax return, subtract the amount of administrative expenses that were not taken or allowed as a deduction in calculating net income for federal fiduciary income tax purposes.

If I understand this correctly, this means fiduciaries can now deduct on Iowa 1041s expenses that executors have opted to deduct on the federal estate tax return; executors get to choose to deduct estate administration costs on either the Federal 706 or the Federal 1041, but not both. This bill makes some sense, as there is no Iowa estate tax; any deductions taken on the federal Form 706 estate return would otherwise provide no Iowa benefit.

It also appears to allow the deduction of any “administrative” expenses that would otherwise be disallowed under the 2% of AGI floor. The explanation to the bill doesn’t add much, so we will have to see if this is how the Department of Revenue reads the bill.

The bill passed both houses unanimously, so it seems likely the Governor will sign it. It is to take effect for “tax years ending on or after July 1, 2015 — so it will apply to the current calendar year.

 

EFTPSPEO operator gets 12 years after looting client payroll taxes. A Kentucky man will go away for a long time for an ambitious list of crimes that include stealing payroll taxes from clients. Wilbur Huff ran a professional employer organization. Such organizations take over employer payroll tax functions for their clients. PEOs file and pay the payroll taxes under their own tax ID number. This differs from traditional payroll tax services, which remit taxes under client tax ID numbers and provide prepared returns for the clients to submit.

From a Department of Justice Press release (my emphasis):

From 2008 to 2010, HUFF controlled O2HR, a professional employer organization (“PEO”) located in Tampa, Florida.  Like other PEOs, O2HR was paid to manage the payroll, tax, and workers’ compensation insurance obligations of its client companies.  However, instead of paying $53 million in taxes that O2HR’s clients owed the IRS, and instead of paying $5 million to Providence Property and Casualty Insurance Company (“Providence P&C”) – an Oklahoma-based insurance company – for workers’ compensation coverage expenses for O2HR clients, HUFF stole the money that his client companies had paid O2HR for those purposes.  Among other things, HUFF diverted millions of dollars from O2HR to fund his investments in unrelated business ventures, and to pay his family members’ personal expenses.  The expenses included mortgages on HUFF’s homes, rent payments for his children’s apartments, staff and equipment for HUFF’s farm, designer clothing, jewelry, and luxury cars.

Taxpayers using traditional payroll tax services can make sure their payroll taxes are actually paid to the IRS by logging into EFTPS, the Electronic Federal Tax Payment System. This doesn’t work for PEOs. That turned out very badly for Mr. Huff’s clients, who still have to pay the IRS the payroll taxes that went for the fancy cars and clothes.

 

buzz20140909Robert D. Flach has your Friday Buzz! It’s the place to go whether you Love Lucy or you love reading about tax administration.

Peter Reilly, Structuring Seems Like A Crime You Can Commit By Accident

 Imagine that you go to the bank every four days and deposit $12,000.  The bank will file currency transaction reports that let the Treasury Department know that.  That notion annoys you, so you start going every three days and deposit $9,000. No more currency transaction reports, but before long there will be suspicious activity reports.  If the reason you made the switch was to stop the currency transaction reports, you have committed the crime of structuring, even if there is nothing illegal about the source of the funds or the use of them and you are paying all your taxes.  

The crime of avoiding paperwork.

Kay Bell, Weather claims, estimated taxes and more June tax tasks

Jack Townsend, Two More Banks Obtain NPAs Under DOJ Swiss Bank Program

Robert Wood, Obama’s Immigration Action Means Tax Refunds For Illegals, Says IRS

TaxGrrrl, IRS, TIGTA Talk Tech, Identity Theft & Security At Congressional Hearing.

 

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Cara Griffith, Is the IRS Protecting Taxpayer Information or State Tax Authorities? (Tax Analysts Blog). “Although the IRS indicated it would make changes to improve the oversight of federal taxpayer information, it still seems information is shared between the IRS and state tax authorities as a matter of course and without a true determination (before information is shared) about whether a state tax authority has a secure system in place to protect the information received.”

Scott Drenkard, Why Do So Many Businesses Incorporate in Delaware? (Tax Policy Blog). “Delaware’s attractiveness for incorporation is driven by many things: favorable incorporation regulations, rules limiting corporate liability, and a second-to-none corporate court system (the Court of Chancery) with judges that are corporate law experts.”

Howard Gleckman, How Many Americans Get Government Assistance? All of Us. But some of us pay more than others for it.

Robert Goulder, Global Tax Harmonization and Other Impossible Things (Tax Analysts Blog)

TaxProf, The IRS Scandal, Day 757 “The IRS responded to a Republican request for an investigation into the Clinton Foundation’s tax-exempt status with a one-page form letter that starts with ‘Dear Sir or Madam.'”

 

Career Corner. ICYMI: AICPA Will Squeeze Excel Into the CPA Exam This Decade (Caleb Newquist, Going Concern).  In my day we had pencils — no calculators, no slide rules, no nothing. Spoiled kids won’t get off my lawn.

 

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Tax Roundup, 6/4/15: Iowa session-end frenzy: What if a young farmer drives his ATV to the laundromat?

Thursday, June 4th, 2015 by Joe Kristan

IMG_1291Sound tax policy? What’s that? Three minor tax bills advanced in the Iowa General Assembly yesterday in the pre-adjournment frenzy. They are all examples of the pursuit of tax legislation unmoored from consideration of sound tax policy.

ATVs. Iowa farmers don’t have to pay sales tax on equipment used “directly and primarily” in the production of agricultural products. The Iowa Department of Revenue holds that the exemption doesn’t apply to general-purpose all-terrain vehicles used to get around the farm — say, to check on crops or livestock (or, incidentally, to go to the good pheasant-hunting spots). The Iowa Senate passed SF 512 yesterday to exempt ATVs “used primarily in agricultural production” from sales tax.

Too bad this isn’t part of a broader movement to exempt all business inputs from sales tax. To the extent that ATVs are a business input, exempting them from sales tax is good policy. I suspect, though, that everyteenage farm boy will have an ATV used primarily in agriculture.

Young Farmers. HF 624 makes minor changes in the tax credit available for custom farming contracts with beginning farmers. No amount of tax credits will change the fundamental difficulties involved in getting into farming. It’s a capital-intensive business that has been consolidating for over a century into larger and more expensive units. This bill isn’t that big a deal, but “Young Farmer” tax credits have no more policy justification than “Young Factory Owner” credits or “Young Cold Storage Warehouse Operator” credits.

20140611-2To the cleaners. Probably the worst tax policy to advance yesterday was HF 603, which excludes the use “self-pay” washing machines from sales tax. While business inputs should not be subject to sales tax, all final consumer expenditures should be. A broader base enables lower rates for everyone. O. Kay Henderson reports on this break:

Representative Josh Byrnes, a Republican from Osage, has met with a couple from St. Ansgar who sold their laundromats in Iowa and opened coin-operated laundromats in Minnesota, which does not charge the sales tax.

“The other part of this is just economic development in general,” Byrnes says. “We have a company that manufactures self-pay units in Fairfield, Iowa, called Dexter and actually they’re looking at some expansion and growth of their company I believe that this will help them get over that hump and help to further their business as well.”

You can make the same “economic development” argument for pretty much anything manufactured in Iowa, including the home laundry machines historically made by Iowa manufacturers Maytag and Amana. It takes a leap of faith to think this will sell even one additional washing machine.

 

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Joseph Henchman, Illinois Governor Suspends New Film Tax Credits, Makes Other Spending Cuts (Tax Policy Blog):

With the two sides at a stalemate, Rauner announced that he is issuing administrative orders to cut $400 million in spending wherever he can. Including:

  • Immediate suspension of all future incentive offers to companies for business attraction and retention, including EDGE credits and the film tax credit program. Commitments already made will be honored.

Unilateral disarmament in the incentive wars is actually doing a big favor for Illinois taxpayers. Those credits enable the well-connected to pick the pockets of the rest of the taxpayers. It is excellent public policy. I hope Iowa decides it needs to ditch its crony tax credits to compete with Illinois.

 

Jason Dinesen, Are HRAs Always Appropriate for Sole Proprietors? Part 2. “HRAs are often — but not always — a good strategy for sole proprietors. Here are some numbers that lay it out.”

Robert Wood, Another Tax-Exempt Marijuana Church—Green Faith Ministry

Kay Bell, IRS working with tax industry, states to upgrade security

 

Dean Zerbe, Tax Court Decision – Good News For Whistleblowers (Procedurally Taxing). “This decision and the actions of the IRS in this case are not going to make administration of the IRS whistleblower program easier – and could have easily been prevented by the IRS.”

Jack Townsend, Whistleblower Case Apparently Involving Wegelin. “Perhaps most interesting for many readers of this blog is that the underlying criminal prosecution and guilty plea appears to involve Wegelin Bank, the Swiss Bank that met its demise for its U.S. tax cheat enabler activities.”

 

 

Renu Zaretsky, There’s Always Room for Improvement. Today’s TaxVox headline roundup covers the IRS data breach, climate-change tax promises, and charitable tax deduction policy, among other things.

Kelly Davis, Kansas Considers Tax Hikes on the Poor to Address Budget Mess (Tax Justice Blog).

 

TaxProf, The IRS Scandal, Day 756

 

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So tell me again how IRS regulation of preparers will fight fraud? IRS Employee Files Hundreds of Fraudulent Tax Returns:

The former IRS worker, 38-year-old Demetria Michele Brown, stole names, birth dates and social security numbers, and provided false information about wages, deductions, addresses and workplaces in order to obtain the refunds.

The documents were filed from her computer and the money returned by the IRS was sent to bank accounts controlled by Brown, St. Louis newspaper reports.

According to prosecutors, the fraudster carried out the activity from 2008 until 2011 and collected $326,000 / €290,000.

I’m sure it wouldn’t have happened if she had to take an ethics exam.

 

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Tax Roundup, 6/3/15: Oh, THAT million-dollar rent payment. And: the IRS data breach is on management, not budget.

Wednesday, June 3rd, 2015 by Joe Kristan

 

Flickr image courtesy John Snape under Creative Commons license

Flickr image courtesy John Snape under Creative Commons license

Pay me now, tax me now. A real estate operator agreed to build and lease a building to a tenant, a plasma collection center. The 10-year lease had a provision allowing the tenant to buy down monthly payments by reimbursing the landlord development costs. In 2008, the tenant chose to pay $1 million to the landlord under this lease clause.

Getting a $1 million payment can complicate your tax planning. Tax Court Judge Ruwe explains the simple approach used by the landlord on the joint return he filed:

Petitioners jointly filed a Form 1040, U.S. Individual Income Tax Return, for 2008. On one of the Schedules E attached to the return petitioners reported rents received of $1,151,493 in connection with the plasma collection center rental. Among the deductions that petitioners claimed on this Schedule E was a $1 million “contribution to construct” expense.

The IRS disagreed, saying that the taxpayer should have reported the amount as rent without the “contribution to construct” deduction.

When it got to Tax Court, the taxpayer dropped the deduction argument and instead argued, first, that the $1 million payment wasn’t income in the first place, but an expense reimbursement. The Tax Court said that the use of the payment to buy down rent payments was fatal to that argument.

The taxpayer then argued that the rental income should be spread over 10 years under the “rent levelling” rules of Section 467. This often-overlooked section was enacted to prevent games like tenants front-loading rent deductions via prepayments to tax-indifferent landlords. Judge Ruwe provides some background (some citations omitted):

Congress enacted section 467 to prevent lessors and lessees from mismatching the reporting of rental income and expenses.  Section 467 provides accrual methods for allocating rents pursuant to a “section 467 rental agreement”. In order to qualify as a section 467 rental agreement, an agreement must have: (1) increasing/decreasing rents or deferred/prepaid rents and (2) aggregate rental payments exceeding $250,000.  Both parties agree that the lease in this case qualifies as a section 467 rental agreement.

The court held that the lease didn’t “allocate” the $1 million payment across the ten-year lease term:

Petitioners argue that they should be permitted to use the constant rental accrual method provided in section 467(b)(2) in order to spread their rental income to other years. However, this method is inapplicable because it was intended to allow the Commissioner to rectify tax avoidance situations, and the regulations provide that this method “may not be used in the absence of a determination by the Commissioner”.

That’s a tool for the IRS, not for you, silly taxpayer!

dimeThe court also held that the rent was not “prepaid rent” that could be deferred over the lease term:

In applying this regulation to the facts of this case we first find that the lease in question does not “specifically allocate” fixed rent to any rental period within the meaning of section 1.467-1(c)(2)(ii)(A), Income Tax Regs. However, the lease does provide for a fixed amount of rent payable during the rental period (i.e., rent payable pursuant to the terms of the lease). Accordingly, in the absence of a “specific” allocation in the rental agreement, the amount of rent payable in 2008 must be allocated to petitioners’ 2008 rental period pursuant to section 1.467-1(c)(2)(ii)(B), Income Tax Regs., which provides that “the amount of fixed rent allocated to a rental period is the amount of fixed rent payable during that rental period.” Therefore, petitioners are required to include as gross income the entire $1 million lump-sum payment made pursuant to the terms of the lease for the year of receipt, 2008.

The Moral? Heads they win, tails you lose, when you aren’t extremely careful drafting a funky lease. Section 467 is obscure and, I suspect, frequently overlooked. It usually doesn’t matter, as most leases don’t get fancy. When they do, though — especially when you see big payment variances — you need to pay attention. The tax results may surprise.

 

TaxProf, TIGTA: IRS Ignored Recommended Security Upgrades That Would Have Prevented Last Week’s Hack Of 100,000 Taxpayer Accounts. Prof. Caron quotes the Washington Post:

A government watchdog told lawmakers Tuesday that the Internal Revenue Service has failed to put in place dozens of security upgrades to fight cyberattacks, improvements he said would have made it “much more difficult” for hackers to gain access to the personal information of 104,000 taxpayers in the spring.

“It would have been much more difficult if they had implemented all of the recommendations we made,” J. Russell George, the Treasury Inspector General for Tax Administration, told the Senate Finance Committee at a hearing on the data breach, which the IRS says was part of an elaborate scheme to claim fraudulent tax refunds.

Identity theft has been a neglected problem at the IRS for years. Billions of dollars have been lost both to petty Florida grifters and to “a worldwide criminal syndicate” taking advantage of IRS laxity. Yet the last two commissioners (and, sadly, the Taxpayer Advocate) have spent more effort trying to set up a preparer regulation scheme that would do nothing to stop fraud — but would increase IRS power and the market share of the big franchise preparers. Priorities.

And it’s not a matter of a pinched budget. Ask Commissioner Koskinen (via Tax Analysts, $link): “Koskinen acknowledged before the Finance Committee that the Get Transcript security breach was not a matter of resources, and thus budget, but of management.”

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Russ Fox, The BEA Responds, or Making IRS Customer Service Look Normal (Bad). Russ reports that BEA has extended the deadline for its mandatory “survey” of foreign business ownership to June 30 for most filers.

Peter Reilly, Failure To File Texas Franchise Tax Form Voids Lawsuit. Sometimes ignoring a state tax filing can bite you in a surprising place.

TaxGrrrl, IRS Changes Position On Identity Theft, Will Provide Copies Of Returns To Victims. “Thanks to an inquiry from Sen. Kelly Ayotte (R-NH), IRS will now provide victims of identity theft with copies of the fraudulent tax returns filed using their personal and financial information.”

Robert Wood, If You Handle Cash, IRS Can Seize First, Ask Questions Later. “Even if your bank/cash efforts come from 100% legal money, the IRS says it still  [c]an seize it.”

IJim Maule, Where’s the Promised Trickle-Over? Another example of the illusory nature of the benefits of publicly-funded pro sports venues.

Keith Fogg, Tax Court Continues to Take the Same “Angle” on Attorney’s Fees When IRS Concedes the Case. “I continue to find this line of cases to contradict the purpose of the statute.  Particularly for those of us representing low-income taxpayers where the amount of tax at issue is low but the amount of time spent to prepare a case for trial not inconsequential, this loophole is swallowing the rule.”

Jack Townsend, Third Circuit Reverses Variance to One Day from Guidelines Range of 63 to 78 Months. Apparently one day isn’t close enough to 63 months.

Tony Nitti, Will Caitlyn Jenner’s Gender Reassignment Costs Be Tax Deductible?

 

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David Brunori, Amazon Does the Right Thing (Tax Analysts Blog):

Shakopee was prepared to provide direct incentives to Amazon. But Amazon told Shakopee it didn’t want them. That’s right — Amazon said no to the tax incentives being offered.

Good. Why?

I would like to think Amazon is being a good corporate citizen, but I really like the idea that it may have backed off because of potential political opposition to the incentives. Only politicians can stop the scourge of incentives. So if political hassles lead to fewer tax incentives, let’s have more political hassles.

Amen.

Megan Scarboro, New Hampshire Considering Cuts to Corporate Tax Rate (Tax Policy Blog):

While New Hampshire generally has a good tax code, a tax cut for businesses could improve the state’s economic climate.

Because the state has no tax on wage income or general sales, New Hampshire is ranks 7th overall in our State Business Tax Climate Index, but a notable weakness is that high corporate rates drive a ranking of 48th in the corporate tax rate component.

In case you are wondering, Iowa is #50.

Jeremy Scott, Republican Support for Brownback’s Tax Plan Begins to Erode (Tax Analysts Blog).

 

Howard Gleckman, What’s Up With the No Climate Tax Pledge?

TaxProf, The IRS Scandal, Day 755

 

Career Corner. Study: Faking Long Hours Is Just As Good As Working Long Hours (Greg Kyte, Going Concern).

 

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Tax Roundup, 6/2/15: See what the thief filed to claim your refund. And: a crowded Irish address files 580 1040s!

Tuesday, June 2nd, 2015 by Joe Kristan

20111040logoIt seems only fair. In a policy change, the IRS will enable identity theft victims to see copies of fraudulent returns filed in their names, reports Tax Analysts ($link).

Tax-related identity theft victims will soon be able to obtain IRS copies of the fraudulent tax returns used to steal their identity, thanks in part to a push by Sen. Kelly Ayotte, R-N.H.

“Once we have a procedure in place, we will issue an announcement informing tax-related identity theft victims of the process for receiving a redacted copy of the fraudulent return,” IRS Commissioner John Koskinen said in a May 28 letter that acknowledged Ayotte as the impetus for the change in the tax agency’s identity theft policy.

The redactions will deal with other taxpayers included on the stolen return. I am guessing could include pretend spouses and dependents used by the ID thief.

This is good news for taxpayers, as it may help them resolve otherwise inexplicable problems with their IRS accounts. It also promises to help shed light on how the thefts occur and, perhaps, help practitioners suggest measures to fight the fraud. It’s also long overdue. It’s not as if thieves can reasonably expect confidentiality for their crimes.

 

20130316-1The luck of the IRisSh. The tax agency still seems to be way behind the ID thieves. This report from the Irish Times is hardly reassuring: 

An address in Kilkenny topped a table of addresses used for multiple potentially fraudulent tax return applications submitted to the Internal Revenue Service in 2012, a study by the US treasury has found.

The address in Kilkenny was used for 580 returns in 2012, which led to “refunds” totalling $218,974 being issued, according to the study by the treasury inspector general for tax administration in the United States.

The IRS likes to claim that budget constraints are behind its abject failure to control the identity theft refund fraud epidemic. The inability to flag hundreds of refunds claimed from the same offshore address — which would seem like an easy enough programming problem to solve — indicates the problems are deeper than lean budgets.

 An address in Kaunas, Lithuania, was used for 525 applications that prompted the payment of $156,274, while an address in Miami, Florida, came third on the list, with 417 applications leading to the payment of $221,806. 

Somehow this doesn’t tell me the IRS needs to expand its responsibilities — but Congress and the President clearly feel otherwise.

 

Will there finally be real steps to fight the problem? Tax Analysts also reports ($link) that the IRS, in cooperation with states and software vendors, will require additional information to process e-filings:

Central to the announcement is a greatly enhanced public-private effort to combat fraud through increased information sharing.

Another upshot is that industry and government will need to process returns differently starting with the 2016 filing season, said Alabama Department of Revenue Commissioner Julie Magee. On the front end, tax return preparation software providers will need to provide multifactor authentication steps when a taxpayer logs in or returns to a site, she said.

The changes also will require vendors to increase by a few dozen data points the amount of information collected from the taxpayer or the return and sent in a standardized format to the IRS and state revenue departments, Magee said.

The story says the details will be announced sometime this month to enable vendors to prepare for next season. We will cover the announcement when it is made.

 

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Robert D. Flach has a fresh Tuesday Buzz roundup, covering topics as diverse as extenders and “I Love Lucy.

William Perez, The Key Benefits of Health Savings Accounts. Tax deductible contributions, tax-free accumulation, and tax-free withdrawals for qualified medical expenses.

Robert Wood, IRS Says If You’re Willful, FBAR Penalties Hit 100%, $10,000 If You’re Not

Peter Reilly, Conservation Easements – Tax Court Lets Owner Sell Them Or Give Them But Not Both

Jason Dinesen, History of Marriage in the Tax Code, Part 9: After Poe v. Seaborn. “Finally in 1948, Congress acted. For the first time, filing statuses were created and we moved closer to the tax system we know today.”

Kay Bell, Ohio becomes 25th state in which Amazon collects sales tax

Me, How states try to tax the visiting employee. My new post at IowaBiz.com, the Des Moines Business Record Business Professionals Blog.

 

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Alan Cole, Oregon to Experiment with Mileage-Based Tax (Tax Policy Blog):

Oregon will become the first state to implement a per-mile tax on driving. The tax is voluntary – an alternative to the state’s fuel tax. Drivers will get the choice of paying one or another. Should they choose the mileage-based tax, they will be charged 1.5 cents per mile, but get a credit to offset the taxes they pay on gas.

States have difficulty increasing gas taxes. Energy-efficient cars and electric (coal powered!) vehicles also are affecting gas tax revenues. The post doesn’t expain how the state will measure mileage; privacy issues promise to be a big obstacle for mileage taxes, but if this can be overcome, expect more states to follow Oregon.

TaxProf, The IRS Scandal, Day 754

Martin Sullivan, How Grover Norquist’s Pledge Can Hurt the Conservative Cause (Tax Analysts Blog). “First, the pledge’s hard and fast prohibition on tax hikes can prevent signers from agreeing to compromises that would result in outcomes most conservatives would consider highly favorable.”

 

Scott Sumner asks Why are interest expenses tax deductible? (Econlog).

The cost of equity (dividends, etc.) is not tax deductible, while interest is deductible. But why?

Good question. I respond with another — why aren’t dividends deductible? That would prevent double taxation of corporate income while making sure corporations can’t be used as incorporated investment portfolios.

 

 

 

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Tax Roundup, 6/1/15: Trusts, but verify. And lots more!

Monday, June 1st, 2015 by Joe Kristan

tack shelterTrust not flaky trusts. There’s a sort of folk belief that the rich and the sophisticated skip out of income taxes through clever use of trusts. That’s not true; trust income is taxed either to the trust owners, their beneficiaries, or to the trusts themselves — and at high effective rates. The 39.6% top rate that kicks in for unmarried individuals at $413,200 applies starting at $12,300 for trusts.

Still, this folk belief creates a market of gullible people who want to be like the sophisticated kids that don’t pay taxes. Where there’s a market, someone will attempt to meet the demand. That can go badly.

It went very badly for two westerners last week. From a Department of Justice press release:

Joseph Ruben Hill aka Joe Hill, 56, and Lucille Kathleen Hill aka Kathy Hill, 58, both of Cheyenne, Wyoming, and Gloria Jean Reeder, 68, of Sedona, Arizona, were convicted on charges of conspiracy to defraud the United States and obstructing a grand jury investigation following a three-week trial. In July 2014, Joe Hill, Kathy Hill and Reeder were indicted for conspiring to defraud the United States by promoting and using a sham trust scheme. Joe Hill and Reeder were also indicted for conspiring to obstruct the grand jury investigation in the District of Wyoming by causing individuals to withhold records required to be produced by federal grand jury subpoenas.

What were they selling?

Essentially, the scheme involved assigning income to the trust by using a bank account in the trust’s name that was opened with a false federal tax identification number. The Hills, Reeder, and many other CCG clients who testified during the trial used the CCG trusts to conceal income and assets from the IRS.

All of their customers can count on thorough and painful IRS exams.

 

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Jana Luttenegger Weiler, Did you miss the last holiday in May? Friday was 529 Day (Davis Brown Tax Law Blog). “A recent Forbes article discussing the so-called holiday reported two-thirds of Americans are unfamiliar with 529 Plans.”

Hank Stern, The Flip Side of Halbig/King/Burntwell. “But there’s another side to this, one which has thus far gone unremarked: is there a potential upside to folks whose subsidies go away? (Insureblog)

William Perez, Identity Theft Statistics from the Latest TIGTA Report

Annette Nellen, Should Sales Tax Deduction Be Made Permanent? House Says Yes

Kay Bell, Are we tax sheep? A U.K. collection effort says ‘yes’:

These psychologists, anthropologists and other observers of human nature suggested that a couple of lines be added to tax collection letters:

“The great majority of people in your local area pay their tax on time. Most people with a debt like yours have paid it by now.”

It worked.

I’m sure this approach has its limits, but it contains an important insight: people will pay their taxes if they think other people do. But if they feel other people get away with not paying, they’ll stop. Nobody likes to be a chump.

Jack Townsend, New IRS FBAR Penalty Guidance

Jim Maule, Can Anyone Do Business Without Tax Subsidies? Most of us have to — which is a powerful case against giving special favors to the well-connected and well-lobbied.

Andy GrewalThe Un-Precedented Tax Court: Summary Opinions (Procedurally Taxing). “It’s a bit strange to pretend that a judicial opinion does not exist…”

Peter Reilly, Structuring – First Kent Hovind – Now Dennis Hastert. The IRS has overreached in its structuring seizures, but keeping deposits under $10,000 in order to avoid the reporting rules for large tax transactions is still illegal. Bank personnel are trained to report suspected structuring. If you do it consistently, your chances of getting caught approach 100%.

Robert Wood, 20 Year Old Oral Agreement To Split Lottery Winnings Is Upheld. Still, it’s always better to get things in writing.

TaxGrrrl, Man’s Tax Refund Seized For Parking Tickets On Car He Never Owned. This sort of injustice is inevitable when the tax law is drafted into service for non-tax chores.

Russ Fox, I’m Shocked, Shocked! That a Chicago Attorney may have Committed Tax Evasion Related to Corruption. Eddie Vrdolyak may be involved.

 

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Tony Nitti, Rick Santorum Announces A Second Run For President: A Look At His Tax Plan. Mr. Santorum is slightly more likely to be president than I am.

 

TaxProf, The IRS Scandal, Day 753The IRS Scandal, Day 752The IRS Scandal, Day 751. I like this from Day 752: “The job of the IRS should be to collect taxes, fairly and efficiently. Since the income tax was enacted in 1913, however, the IRS has appropriated to itself—sometimes on its own, sometimes with congressional blessing—the right to make political judgments about groups of citizens. That is the central failure revealed by this scandal.”

 

Scott Drenkard, How Tax Reform Could Help Stabilize the Housing System (Tax Policy Blog):

Removing the impediment to saving baked into the tax code, then, has real impacts on real people. It helps people save for down payments on homes, or to put money toward education. Perhaps, if pared with a reduction in policies meant to artificially reduce down payments, tax reform could be an important component to stabilizing the housing market.

No-down-payment means you’re betting someone else’s money.

 

Richard Phillips, Martin O’Malley’s Record on Taxes is Progressive (Tax Policy Blog). That means he likes to raise them.

News from the Profession. Madoff Auditor Better at Cooperating Than Auditing, Won’t Serve Time (Caleb Newquist, Going Concern)

 

There will be no leftovers at the putlucks. Indiana Marijuana Church Granted Tax-Exempt Status, Plans ‘Call To Worship’ When Members Will Light Up (TaxProf).

 

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Tax Roundup, 5/28/15: Tax Court doesn’t let auto dealer undo LIFO termination seven years later. And more!

Thursday, May 28th, 2015 by Joe Kristan

 

No Walnut STYou messed up, but you’re stuck with it. A California auto dealer decided to get off LIFO inventory. “Last-in, First-out” inventory accounting generally reduces current income by capitalizing smaller amounts in inventory over time. If you sell your business, however, it catches up with you — those savings all come into income at once.

The auto dealership operated as an S corporation. The owner decided that because he might be selling soon, he would go off LIFO using the automatic method change procedure then offered by the IRS. That procedure, Rev. Proc. 97-37, allowed him to spread the additional income over four years.

Something went wrong. The taxpayer represented on the Form 3115 filed under the IRS procedure that it would value all inventory under the lower of (FIFO) cost or market, but instead it valued its new cars, used cars and parts three different ways. This went unnoticed and unchallenged for a number of years, starting in 2001. Needless to say, the contemplated sale of the dealership did not occur in the meantime.

At some point, the dealership’s tax preparer concluded the different methods might be a problem after attending a seminar. In 2009, they filed amended returns for 2002 through 2007 that said the LIFO termination was ineffective and that as a result the taxable income for those years was overstated – by about $875,000 for 2002 and 2003 alone.

This led to a strange argument, where the taxpayer argued that their failure to properly follow Rev. Proc. 97-37 meant their LIFO termination was never effective. The IRS said the taxpayer’s inadequate compliance was good enough, and the taxpayer is stuck with the no-longer-desired LIFO termination.

Tax Court Judge Wherry decided that the automatic change failed — siding with the taxpayer — but that didn’t settle the issue:

First, we must decide whether, notwithstanding its failure to secure respondent’s automatic consent in 2001, JHH’s filing of its 2001 through 2007 tax returns in accordance with a new method of accounting was a change in method of accounting. If so, second, we must ascertain whether the amended returns reflect a further change in method of accounting for which respondent’s consent is again required. If it is, then because respondent has not consented to the change, JHH may not revert to the LIFO method simply by filing amended returns.

The court decided that the filing of on-LIFO returns for 2001 through 2007 by the taxpayer — referred to as “JHH” —  effected an accounting method change, even though the automatic change was ineffective (citations omitted):

…”a short-lived deviation from an already established method of accounting need not be viewed as a establishing a new method of accounting.” And in that case, “neither the deviation from, nor the subsequent adherence to, the method of accounting would be a change in method of accounting.” 

As we observed in Huffman: “The question, of course, is what is short-lived.”

Seven years wasn’t short enough, to the court:

Regardless of the upper temporal boundary of a “short-lived deviation”, we think that seven years lies beyond it. JHH’s “consistent treatment of an item involving a question of timing * * * establishes such treatment as a method of accounting.”  Notwithstanding its failure to secure respondent’s automatic consent, JHH changed its method of accounting from LIFO by accounting for its vehicles inventory on the specific identification method on its 2001 through 2007 tax returns.

20121212-1The court said the IRS has two choices when confronted with such an unauthorized method change: force the taxpayer to change to the old method, or accept the unauthorized change, imposing any adjustments necessary to avoid double-counting. The IRS chose to accept the change.

That meant the attempt to go back on LIFO was another method change, again requiring IRS consent. The IRS wasn’t going along, and the taxpayer was stuck with FIFO.

The moral? Many taxpayers filed automatic accounting method changes for 2014 under the “repair reg” rules. This case shows that the IRS can enforce the automatic method change conditions and deny benefits to taxpayers who don’t dot all of their “i”s.

It also shows reminds us that if you are doing something wrong for a number of years, it becomes “right,” in that it becomes an accounting method. It might be an improper method, but you still need IRS consent to change it. Many improper methods can be changed automatically, but sometimes advanced IRS permission is required. If you don’t do it “right,” the IRS holds all the cards.

Cite: Hawse, T.C. Memo. 2015-99; No. 8267-12

 

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Tom VanAntwerp, How Hackers Breached the IRS and Stole $50 Million (Tax Policy Blog):

Nicholas Weaver, a researcher at the University of California, Berkeley, previously tried to access his own transcripts without resorting to personal knowledge. Using the real estate website Zillow and personal information site Spokeo, he was able to successfully find answers to the personal questions that only he should have known.

Cybercriminals who specialize in stealing and processing this personal data en masse were able to answer these identifying questions at scale. Much of the information used by the IRS to verify identity is either publicly available or for sale to underground cybercriminals. Hackers can buy access to stolen consumer or financial data, and then write a program to plug answers into the questions asked by the IRS. Once hackers successfully claim an identity, they can use the information from previous years’ tax returns to file new, fraudulent returns and steal tax refunds.

That’s… not comforting.

 

Our friends the Russians. AP sources: IRS believes identity thieves from Russia (KWWL.com)

TaxProf, GAO, TIGTA Warned Of IRS’s Lax Computer Security For Years Before Hack Of 100,000 Taxpayer Accounts On IRS Website.

William Perez, What Can We Do Differently in Light of the IRS Data Breach. Some suggestions for protecting your personal data.

 

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Robert D. Flach, WHAT A DISRUPTIVE DEVELOPMENT THIS IS!. Robert refers to the late arrival of corrected 1099s. “Clients who would normally send me their “stuff” in early or mid-February – allowing for a much smoother work flow during the season – now must wait until mid-March because of the need to “wait and see” if corrected brokerage reports arrive.”

Russ Fox, Surprise! You Heard About that May 29th Filing Deadline, Right?.

TaxGrrrl, Taxpayers Have More Time To File In 2016. “Three more days!”

Robert Wood, Man Gets Prison For Inventing His Own Church, And It’s Not Scientology. Technically, his prison time isn’t for starting a new church — that’s legal — but for using it to evade taxes.

Peter Reilly, Limits Of Hobby Lobby – Priests For Life Denied Rehearing On Contraception Mandate.

Kay Bell, Italy charges Bulgari luxury jewelry heirs with tax evasion

 

Len Burman, The Trouble with the FairTax (TaxVox). Mr. Burman concentrates on its distribution among income classes, rather than its overall implausibility.

TaxProf, The IRS Scandal, Day 749

Career Corner. Reminder: Robots Are Coming For Your Accounting Jobs (Caleb Newquist, Going Concern).

 

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Tax Roundup, 5/27/15: 104,000 taxpayers compromised by IRS transcript app breach. And: EITC is no free lunch!

Wednesday, May 27th, 2015 by Joe Kristan

20130419-1That took some work. The IRS disclosed yesterday that 104,000 taxpayer accounts have been compromised by identity thieves who did it the hard way. The Wall Street Journal reports:

The IRS said that to access the information, crooks had to clear a multistep authentication process that required prior personal knowledge about the taxpayer, including Social Security information, date of birth, tax filing status and street address before accessing IRS systems. The process also involved answering personal identity-verification questions, such as “What was your high school mascot?”

Mr. Koskinen, when asked how impostors obtained answers to these so-called “out-of-wallet” questions, suggested social media might have played a role.

“This is not a hack or data breach. These are impostors pretending to be someone who has enough information” to get more, said Mr. Koskinen, who said thieves might be using sophisticated programs to aggregate and mine data.

This is much more difficult than your standard ID theft, where all you need is a Social Security number to go with a name, and maybe a birth date. Getting through the IRS transcript access system requires a fair amount of data entry and outside information.

The breach will complicate filing for the 104,000 taxpayers whose data was accessed, and possibly for another 96,000 taxpayers whose records the thieves failed to breach. Tax Analysts reports ($link):

The IRS will provide credit monitoring and protection to the 104,000 victims at the agency’s expense, Koskinen said. Victims will also be given the IRS’s identity protection personal identification numbers so they are not targeted again, he said. All 200,000 of the taxpayers affected by the raid will be sent notification letters from the IRS and will have their accounts flagged on the agency’s core processing systems, he added.

The IRS has been losing the IT security wars for some time. It’s a shame, because the transcript service has been very useful for taxpayers needing return information for loans or to resolve IRS notices. I think the IRS will eventually have to delay refunds and processing so that it will be able to match third-party information — W-2s and 1099s — with returns before issuing refunds. The era of “rapid refunds” is coming to an end.

Lots of coverage of this. The TaxProf has a roundup. Other coverage:

William Perez, IRS Data Breach: Hackers Gain Access Through ‘Get Transcript’ Web App. “The IRS emphasized that taxpayers don’t need to do anything further. The agency will be sending letters to affected taxpayers explaining what to do next.”

TaxGrrrl, IRS Says Identity Thieves Accessed Tax Transcripts For More Than 100,000 Taxpayers “IRS was alerted to the problem when its monitoring systems noted an unusual amount of activity related to the [transcript] application.”

Russ FoxIRS “Get Transcript” Application Hacked; 104,000 Tax Returns Illegally Accessed. ” It would be time consuming but entirely possible for a stranger who had my social security number and date of birth to answer all the other verification questions.”

Accounting Today, IRS Detects Massive Data Breach in ‘Get Transcript’ Application

J.D. Tucille, Details About 100,000 Taxpayer Accounts Stolen From IRS (Reason.com)

“[T]he vast databases held by the IRS, HHS, security agencies, etc, will be leaked on purpose, leaked because of bureaucrat sloppiness, or be hacked. The more they collect, the more that will eventually leak.” Chris Edwards, director of tax policy studies at the Cato Institute, predicted to me last year. That “eventually”—at least, the latest round of it—is now.

Oh, goody.

 

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Kay Bell, Winners of meet-the-candidate contests face tax costs:

True, you won’t pay from your own pocket for the flights, hotel stay, chauffeur or meal with a future president. But the value of those things, like all prizes, is considered taxable by the Internal Revenue Service.

The winners can’t simply ignore the potential tax bill. The political contest organizers should send them, and the IRS, 1099 forms stating the value of the prize.

Well, that’s one tax problem I won’t be having, unless they start paying voters enormous amounts to talk to us. I will meet any candidate who will pay me $100,000 for 10 minutes of my time. Meet me at the Timbuktuu on the EMC Building skywalk.

 

Jason Dinesen, From the Archives: You Won the Dream Home, Part 4 — Changing My Mind

Jack Townsend, Switzerland Publishes Certain Identifying Information of Certain Foreign Depositors in Swiss Banks

Bob Vineyard, Bad Moon Rising (Insureblog). “Obamacare news isn’t good.”

 

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David Brunori, Scalia is Right (Tax Analsyts Blog). “The dormant commerce clause is here to stay, with precedent and established expectations and all, but it would be nice if we just admitted that we made it up.”

Robert Wood, Why Aren’t Those $26.4M Speech Fees Taxable To Bill & Hillary Clinton?

James Kennedy,Pennsylvania Senate Considers Hiking Income and Sales Taxes (Tax Policy Blog). They’re pretty high already.

TaxProf, The IRS Scandal, Day 748

 

Howard Gleckman, Marco Rubio Wasn’t the Only One Who Cashed Out an IRA Last Year (TaxVox). “Substantial assets leak because people under age 59 ½ take early withdrawals or borrow against their IRAs or 401(k). And the problem raises an important and challenging policy question:  Should the money in these accounts be available for non-retirement purposes?”

 

eic 2014Leslie Book offers thoughful consideration of Warrren Buffet’s support for an expanded Earned Income Tax Credit (Procedurally Taxing). You should read the whole thing, I’ll highlight this part:

As Mr. Buffet knows, there is no such thing as a free lunch. Using the tax system to deliver benefits is no silver bullet when it comes to addressing inequality. To administer the tax system as we know it today is no easy task. When Congress asks the IRS to do more, there are costs to taxpayers and the system overall. As Congress considers whether to ratchet up EITC, it should do so with the absence of rhetoric. It should also consider the tools it wants to give IRS to combat errors as well as address what costs it wants to impose on claimants and third parties. The current system passes costs on others, many of which are hidden. As with lunch, someone has to pick up the tab.

Among the costs is the 20-25% improper payment rate. Another cost is the high hidden marginal tax rate caused by the phase-out of the credit as incomes increase — a combined federal and state rate that can exceed 50%. And there is a cost to an already-stressed tax system of administering a social program.

Sebastian Johnson, Some States Support Earned Income Tax Credits for Working Families, Others Fall Short. (Tax Justice Blog) A piece that is oblivious to the issues raised by Leslie Book.

 

News from the Profession. EY Law Continues to Not Threaten Law Firms By Poaching Lawyers (Caleb Newquist, Going Concern).

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Tax Roundup, 5/26/15: It’s not always the onions that make you cry. And: beer taxes and other summer fun!

Tuesday, May 26th, 2015 by Joe Kristan

IMG_1589Onions aren’t the only thing that will make you cry. An S corporation brokering onions tried to reduce its tax bill through a “Section 419(f)” arrangement that purported to be a tax-exempt employee benefit plan. In reality, many such plans were actually tax shelters attempting to invest deductible employer contributions in variable life policies and similar financial instruments benefiting the owner.

The IRS got wise to these plans and issued Notice 95-34, ruling that such arrangements are “reportable transactions” subject to special taxpayer disclosure rules. Failure to make such disclosures can trigger severe penalties

A Wisconsin U.S. District Court has ruled the onion broker had such a plan, and is subject to the penalties, to the tune of $40,000:

In short, the trial evidence showed that CJA’s Affiliated Employers Health & Welfare Trust was an aggregation of separate plans maintained for individual employers that were experience-rated with respect to individual employers, that is, they were structured so as to assure each employer that its contributions would benefit only its own employees. The money that participating employers paid into the Plan bought insurance for only their own employees; there was no pooled risk.

The Moral? It’s a cliché, but it’s still valid: when something seems too good to be true, it probably is. The taxpayer presumably lost their deductions on top of the $40,000 penalty.

Cite: Vee’s Marketing, DC-WD-WI No. 3:13-ccv-00481

 

 

With summer here, you may want to know How High Are Beer Taxes in Your State? Scott Drenkard of the Tax Policy Blog provides this map:

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I don’t understand the high rates in the southeast. Whisky protectionism? Temperance movement echoes? Whatever the reasons there, it’s hard to imagine why they would apply to Alaska and Hawaii.

 

Megan McArdle, Sticker Shock for Some Obamacare Customers:

So the proposed 2016 Obamacare rates have been filed in many states, and in many states, the numbers are eye-popping. Market leaders are requesting double-digit increases in a lot of places. Some of the biggest are really double-digit: 51 percent in New Mexico, 36 percent in Tennessee, 30 percent in Maryland, 25 percent in Oregon. The reason? They say that with a full year of claims data under their belt for the first time since Obamacare went into effect, they’re finding the insurance pool was considerably older and sicker than expected.

Obamacare? You mean the “Affordable” Care Act.

 

TaxGrrrl, Civil War Widows, General Logan & Why We Celebrate Memorial Day. Interesting history involving an Illinois politician who made a pretty good Civil War general.

Kay Bell, Memorial Day thanks for the ultimate military sacrifice

Robert D. Flach starts this short work week with fresh Buzz! Robert takes issue with Warren Buffet’s support for the Earned Income Tax Credit: “While federal welfare, which is what the EITC is, may be appropriate, it should not be distributed via the US Tax Code.”

Jason Dinesen, From the Archives: New Preparer Requirements on Earned Income Credit = Higher Fees for Clients

Tony Nitti, Tax Geek Tuesday: When Can A Business Deduct Prepaid Expenses? A surprisingly complex issue.

Russ Fox, Staking and the WSOP: 2015 Update. Having backers can complicate a poker pro’s tax life.

 

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Robert Wood, Florida Says Uber Drivers Are Employees, But FedEx, Other Cases Promise Long Battle

Stephen Olsen, Summary Opinions. The latest roundup by Procedurally Taxing of developments in the tax procedure world.

Jack Townsend, IRS Establishes Cybercrimes Unit to Combat Solen ID Tax Fraud. At least five years too late.

Paul Neiffer tells about this year’s ISU-CALT Summer Seminar Series. I’m not participating this year, probably making it a better program than ever!

 

Renu Zaretsky, Roads, Schools, Sales and Wills. A delay in the federal highway bill, gas tax politics in California, and Amazon pays U.K. tax in today’s TaxVox headline roundup.

TaxProf, The IRS Scandal, Day 744Day 745Day 746Day 747

Career Corner. More Quick and Dirty Tips for Your Insider Trading Scheme (Leona May, Going Concern)

 

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Tax Roundup, 5/21/15: Credits targeting what you would do anyway! And: minimum wage, ACA, and lots more.

Thursday, May 21st, 2015 by Joe Kristan

 

IMG_0603Paying people to do what they would do anyway. Rhode Island is proposing a new credit for “job creators,” reports David Brunori:

It would work the same way other bad tax incentive programs work: A company that creates new jobs in the state would receive a reduction in its income tax. The proposal mirrors a bill introduced earlier this year. Basically, the bill, if signed into law, would reduce the tax rate for companies that hire full-time employees in Rhode Island who work at least 30 hours per week and receive a salary that is at least 250 percent of the prevailing hourly minimum wage in the state. Large companies would be eligible for a 0.25 percent tax incentive off their net income tax rate for every 50 new hires. Smaller companies would be eligible for a 0.25 percent incentive off their personal income tax for every 10 new hires. The rate reduction would be limited to a maximum of 6 percentage points for the applicable income tax rate and to no more than 3 percentage points for the applicable personal income tax rate. Complicated? You bet. But that’s why law firms like the incentive business.

Statewide employment is expected to grow in Rhode Island in the next several years without the political gimmicks of tax incentives. So this bill is unnecessary (no one thinks the incentives will lead to growth greater than what’s expected). In other words, there is no incentive being provided; the state is just making a welfare payment.

This is true of all “job creation” credits. As David points out: “No sane business owner will hire someone for $40,000 simply to save $4,000 on her tax bill. This bill will not create one new job in Rhode Island.”

An Illinois representative has proposed a “Patriot Employer Tax Credit Act,” (Tax Analysts, $link) with a tax credit of up to $1,500 for employers who:

-Invest in American Jobs: Does not move its headquarters overseas or reduce the number or percentage of U.S.-based workers in comparison to workers overseas.

-Pay Fair Wages: Pay 90% or more of U.S. workers an hourly wage of at least $15 per hour.

-Provide Quality Health Insurance: Offer ACA-compliant healthcare to employees.

-Prepare Workers for Retirement: Provide 90% of non-highly compensated U.S. employees a defined benefit plan OR a defined contribution plan and contribute at least 5% of worker compensation.

-Support Our Troops and Veterans: Pay the difference between regular salary and military compensation for all National Guard and Reserve employees called for active duty and have a plan in place to recruit veterans.

-Create a Diverse Workforce: Have a plan in place to recruit employees with disabilities.

By claiming the word “patriot,” it wraps bad economics in the flag. Because nothing says “I love my country” like tax credits.

 

20150423-1Jana Luttenegger Weiler, Health Savings Accounts: Beneficiaries and Taxes (Davis Brown Tax Law Blog). “As HSAs become more common, it is important to consider the HSA in various capacities, including in premarital agreements, death, and divorce.”

Tony Nitti, Tax Court: In Order To Convert A Home To A Rental, You Should Probably Rent It

Jason Dinesen, Glossary of Tax Terms: AMT.

TaxGrrrl, Taxpayer’s Call To IRS Accidentally Broadcast On Howard Stern’s Radio Show. I’m just amazed the caller reached an actual IRS agent.

Peter Reilly, Tax Girl Challenges Homeownership And You Should Really Listen To Her. “To many of us homeownership is a necessary step in becoming a full-fledged adult and a house that is rented can never be a home.  This book might help you rethink that attitude.”

Jim Maule, The Dependency Exemption Parental Tie-Breaker Rule. “Under the parental tie breaker rule in section 152(c)(4)(B), if the parents claiming a dependency exemption deduction for a qualifying child do not file a joint return, the child is treated as the qualifying child of the parent with whom the child resided for the longest period of time during the taxable year, or if the child resides with both parents for the same amount of time during the taxable year, the child is treated as the qualifying child of the parent with the highest adjusted gross income.”

Paul Neiffer, April 18 (or 19), 2016 is Due Date for 2015 tax returns

Jack Townsend, Remaining Swiss Bank Criminal Investigations Likely to Go Into 2016

Robert Wood, Appalling $187 Million Cancer Charity Fraud Case Settles — When 97% Of Money Isn’t For Charity

Keith Fogg, Argument Over Furlough of National Taxpayer Advocate Set for June 2 Before the Federal Circuit (Procedurally Taxing)

 

 

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Cara Griffith, Tax Reform Laboratories (Tax Analysts Blog). “Federal lawmakers could learn a lot from an examination of what has worked and what hasn’t across the nation.”

 

Insureblog, Dear HHS, Will You Share My ACA Success Story?:

  So how has this Obamacare thingy helped my small company:-We have seen an overall decrease in benefits since 2010.
-From November 2010 to our current plan year premiums have increased 58.7%.
-If we would have been forced to an Obamacare compliant plan the increase would have been 116.7%

Tom Vander Well, Placing customers on hold without diminishing satisfaction (IowaBiz.com). The suggestions do not endorse the IRS practice of “courtesy disconnects.”

 

Carl Davis, Sweet Sixteen: States Continue to Take On Gas Tax Reform (Tax Justice Blog). To the Tax Justice folks, tax reform = tax increase.

 

Joseph Thorndike, Republicans Should Embrace the Gas Tax – After All, They Invented It (Tax Analysts Blog). Everyone loves being told what they “should” like.

 

Kay Bell, Will Congress OK highway money before it hits the road?

 

Elaine Maag, A Redesigned Earned Income Tax Credit Could Encourage Work by Childless Adults. (TaxVox). Only if they can re-design it so that it doesn’t squander 25% of the cost on improper payments.

 

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Megan McArdle, $15 Minimum Wage Will Hurt Workers. A well-explained post explaining what should be obvious:

When the minimum wage goes up, owners do not en masse shut down their restaurants or lay off their staff. What is more likely to happen is that prices will rise, sales will fall off somewhat, and owner profits will be somewhat reduced. People who were looking at opening a fast food or retail or low-wage manufacturing concern will run the numbers and decide that the potential profits can’t justify the risk of some operations. Some folks who have been in the business for a while will conclude that with reduced profits, it’s no longer worth putting their hours into the business, so they’ll close the business and retire or do something else. Businesses that were not very profitable with the earlier minimum wage will slip into the red, and they will miss their franchise payments or loan installments and be forced out of business. Many owners who stay in business will look to invest in labor saving technology that can reduce their headcount, like touch-screen ordering or soda stations that let you fill your own drinks.

These sorts of decisions take a while to make. They still add up, in the end, to deadweight loss — that is, along with a net transfer of money from owners and customers to employees, there will also simply be fewer employees in some businesses. The workers who are dropped have effectively gone from $9 an hour to $0 an hour.

Most people who insist that minimum wage increases are harmless snicker at those who believe in “intelligent design.” Yet they are themselves trying to impose their own design on an eveolutionary system. At least creationists don’t claim to be designing species.

 

TaxProf, The IRS Scandal, Day 742

 

News from the Profession. Accountants Lack Some Skills (Caleb Newquist, Going Concern). “But it’s foolish to expect accounting graduates to have skills for corporate accounting. They don’t have them because they don’t learn them in school and they don’t learn them in public accounting.”

 

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Tax Roundup, 5/20/15: April 15 is on April 18 next year. And: exit > voice.

Wednesday, May 20th, 2015 by Joe Kristan

20140805-3It looks like we’ll be working an extra weekend next April. Thanks to the puzzling rules regarding the observance of Emancipation Day in Washington D.C., the deadline for 1040s next year will be April 18 – even though April 15 falls on a Friday. Residents of Massachusetts and Maine get even one more day. From Rev. Rul. 2015-13:

The District of Columbia observes Emancipation Day on Friday, April 15 when April 16 is a Saturday. This makes Monday, April 18, the ordinary due date for filing income tax returns. However, in this situation, Monday, April 18, is the third Monday in April, the date that Massachusetts and Maine observe Patriots’ Day. Because residents of Massachusetts and Maine may elect to hand carry their income tax returns to their local IRS offices, A (a Massachusetts resident) has until the next succeeding day that is not a Saturday, Sunday, or legal holiday to file A’s income tax return. Thus, A has until Tuesday, April 19, to file A’s income tax return.

I suppose I will appreciate the extra time when the deadline comes, but I would really just as soon get it over with.

Kay Bell has more.

 

Update on Iowa effects of Wynne decision. The Iowa Department of Revenue public information officer responded to my inquiry about the state’s reaction to Monday’s Supreme Court decision requiring states to allow a credit on resident individual returns for taxes paid in other states: “We are in the process of reviewing the decision.”

Not surprising, as it is a new decision. If you have a refund statute of limitations expiring soon, don’t wait on their guidance to file a protective refund claim for income taxes paid in non-Iowa municipalities.

 

20150504-2Alito on the limits of politicsThe dissent in Wynne said that Maryland resident taxpayers afflicted with a discriminatory double tax on out-of-state income shouldn’t have prevailed becasue they had recourse to the ballot box to protect their interests. Writing for the majority, Justice Alito pointed out that this does little good (my emphasis):

In addition, the notion that the victims of such discrimination have a complete remedy at the polls is fanciful. It is likely that only a distinct minority of a State’s residents earns income out of State. Schemes that discriminate against income earned in other States may be attractive to legislators and a majority of their constituents for precisely this reason. It is even more farfetched to suggest that natural persons with out-of-state income are better able to influence state lawmakers than large corporations headquartered in the State. In short, petitioner’s argument would leave no security where the majority of voters prefer protectionism at the expense of the few who earn income interstate.

This is actually a powerful argument to limit the role of government in the first place. One voter has negligible power to overthrow unfair legislation. In the one-party rule typical of large American cities, political activity for a minority view is futile, Jim Maule notwithstanding.

20140513-1Arnold Kling points out how market institutions, which hold no elections but allow choice, can actually be more empowering for an individual:

Neither my local supermarket nor any of its suppliers has a way for me to exercise voice. They don’t hold elections. They don’t have town-hall meetings where they explain their plans for what will be in the store. By democratic standards, I am powerless in the supermarket.

And yet, I feel much freer in the supermarket than I do with respect to my county, state, or federal government. For each item in the supermarket, I can choose whether to put it into my cart and pay for it or leave it on the shelf. I can walk out of the supermarket at any time and go to a competing grocery.

The exercise of voice, including the right to vote, is not the ultimate expression of freedom. Rather, it is the last refuge of those who suffer under a monopoly.

He argues  that we should be able to choose governing institutions more like we choose other service providers:

In fact, if we had real competitive government, then we would be no more interested in elections and speaking out to government officials than we are in holding elections and town-hall meetings at the supermarket.

He makes this argument more detail in his book Unchecked and Unbalanced). Somehow I don’t think that will go over well with our current officeholders.

 

 

Russ Fox, The Real Impact of the Wynne Decision: “However, many states do not give credits for local taxes. Joe Kristan highlighted Iowa today; Kentucky is another state that does not currently offer such tax credits. Under Wynne I believe they’ll be required to offer such credits.”

Robert D. Flach, DEDUCTING MORTGAGE INTEREST:

Taxpayers are required to keep separate track of acquisition debt and home equity debt, to make sure that the deduction on Schedule A does not include interest on debt principal that exceed the statutory maximums ($1 Million for acquisition debt and $100,000 for home equity debt – no limit on grandfathered debt), and to determine what interest deduction to add back on Form 6251 when calculating Alternative Minimum Taxable Income.

I firmly believe that 99.5% of taxpayers do not do this. I do not know of any taxpayer who does.

The clients don’t, but that doesn’t mean preparers shouldn’t watch out for these items. When taxpayers have interest on multiple home loans, or very high home interest deductions, alert preparers have to ask questions to make sure the deductions and AMT are determined correctly.

Annette Nellen, Filing season tax updates

Robert Wood, Floyd Mayweather Gambles, Wins, Pays IRS:

 

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Another ACA Co-op on the ropes? Hank Stern reports at Insureblog that the Kentucky health care cooperative is insolvent. That means it may go the way of Iowa’s short lived and expensive catastrophe Co-Oportunity.

 

Jeremy Scott, Hawkins Casts Powerful Shadow Over OPR (Tax Analysts Blog):

Hawkins will probably always face at least some criticism because of the overreach of the preparer regime, and some accusations that she was too favorable to the large practitioner groups such as the ABA and the American Institute of Certified Public Accountants. But she should more properly be remembered as the person who brought coherence to IRS Circular 230 enforcement and essentially rebuilt OPR from scratch.

 

In fairness, the preparer regulation overreach was decided above her level.

 

Scott Sumner, A consumption tax is a wealth tax (Econlog). “For any income tax regime, there is a consumption tax regime of equal progressivity. Unfortunately that equally progressive regime will look much less progressive. This is one of the biggest barriers to tax reform.”

Kyle Pomerleau, What are Flat taxes? (Tax Policy Blog):

When most people hear “Flat Tax,” they usually think a tax system with one, flat tax rate on all income. They also imagine a tax system with little or no deductions or credits. While this is a possible way to design a flat tax, it is not what makes a flat tax a flat tax. The key to a flat tax goes beyond its rates. The key is that it is a consumption tax. You would not call a low-rate tax on all transactions in an economy a flat tax, even though it had one, flat rate.

Interesting.

 

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Howard Gleckman, Are GOP Presidential Candidates Downplaying Tax Cuts Or Hiding The Ball? Referring to Joseph Thorndike, he says: “Joe, who is very much in the watch-what-they-do-not what-they-say (WWTDNWTS) camp, noted that while few GOP presidential hopefuls are talking about tax cuts, many of their proposals are, in fact tax cuts.”

TaxProf, The IRS Scandal, Day 741

 

Caleb Newquist,  “Just Ask the Guy” Not Always a Futile Fraud Detection Method (Going Concern).  Not foolproof, though.

 

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Tax Roundup, 5/19/15: Is yesterday’s U.S. Supreme Court decision an Iowa refund opportunity? And AICPA looks for love!

Tuesday, May 19th, 2015 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.

Time for Iowans to claim refunds for local income taxes paid out-of-state? The U.S. Supreme Court yesterday ruled that Maryland was required to allow its residents credit for taxes paid in other states.

State tax systems normally tax resident individuals on 100% of their taxable income. They tax non-residents on only the share of income apportioned or allocated to the state. In order to keep their residents from being clobbered by multiple state income taxes, the states typically allow them a “credit for taxes paid in other states.” This is, roughly, the lesser of the tax paid to the other state or the resident state tax computed on the out-of-state income.

Maryland failed to allow a credit for taxes paid in other states for the “county” portion of its individual income tax. The U.S. Supreme court ordered Maryland to issue such a credit to the plaintiffs, who had out-of-state S corporation income.

Iowa allows a credit for taxes paid in other states, but does not allow such a credit for taxes paid in municipalities or counties. These taxes can be significant. Many Iowans pay taxes in New York City, Kansas City, St. Louis, or Washington, D.C., for example. Many Ohio municipalities also impose income taxes. While the Supreme Court decision doesn’t specifically address such taxes, the court’s logic that double-taxes discriminate against interstate commerce would seem to apply here. A Tax Analysts article ($link) on the decision notes (my emphasis):

Local governments filed an amicus brief  saying Wynne may have implications and that there are many states with long-established tax programs like Maryland’s that do not afford dollar-for-dollar credits to residents for all out-of-state income taxes paid.

That brief identified Wisconsin and North Carolina as states that do not allow a credit against local income taxes, as well as a number of local governments that fail to provide a credit for state taxes paid against local taxes, including Philadelphia; Cleveland; Detroit; Indiana’s counties; Kansas City, Missouri; St. Louis; and Wilmington, Delaware.

I have emailed an Iowa Department of Revenue representative asking how they will respond to the case, and will report whatever I may hear back from them. Meanwhile, taxpayers who extended their 2011 Iowa returns and paid municipal taxes elsewhere should consider filing protective refund claims while their statutue of limitations remains open.

The TaxProf has a roundup of coverage.

Cite: COMPTROLLER OF THE TREASURY OF MARYLAND v. WYNNE ET UX. No 13-485.

supreme courtMore coverage:

Joseph Henchman, A Victory for Taxpayers: SCOTUS Strikes down Maryland Tax Law (Tax Policy Blog). “This is important not just for one Maryland business, but for anyone who does business in more than one state, travels in more than one state, or lives in one state and works in another.”

Howard Gleckman, A Divided Supreme Court Rejects Maryland’s Tax On Out-Of-State Income (TaxVox). “But given the closeness of the decision and the wide gulf between the majority and the minority, today’s ruling may not be the last word in the argument over whether, and how, states can tax out-of-state income.”

Russ Fox, A Wynne for the Dormant Commerce Clause. “This case also highlights the difficulties facing a taxpayer without deep pockets.”

TaxGrrrl, In Landmark Case, Supreme Court Finds Maryland’s Tax Scheme Unconstitutional. “In the end, it all came down to this: “the total tax burden on interstate commerce is higher” under Maryland’s current tax scheme. That double taxation scheme, the Court found, is unconstitutional.”

Kay Bell, Supreme Court tax ruling could cost Maryland $200+ million. Wheneer a taxing authority gets caught imposing an illegal tax, they always moan about how terrible it will be to repay their ill-gotten gains. I’ll give them the same sympathy they typically give a taxpayer who loses a fight with them.

 

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Bloomberg, Iowa Spent $50 Million to Lure IBM. Then the Firings Started. That was $50 million paid by other Iowa businesses and their employees, money they could have used to grow businesses that might not have fled.

 

Jason Dinesen, Why Make Estimated Tax Payments, Part 2. “Here’s the reason: if you’re fully self-employed, you don’t draw a paycheck in the traditional sense.

Paul Neiffer, What Runs Through the Estate! “In many cases, the heirs will use the cost basis from grandpa and not pick up the extra cost from mom and dad.”

Robert D. Flach comes through with fresh Tueesday Buzz, including thoughts on the use of the tax law as a welfare program.

William Perez, 10 Emerging Financial Technology Apps with a Tax-Angle

 

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Peter ReillyFree Kent Hovind Movement Has Big Win. ” Judge Margaret Casey Rodgers has granted Kent Hovind’s motion for a judgment of acquittal on the contempt of court charge that he was convicted of in March.”

Robert Wood, U2’s Bono Sounds Increasingly Like Warren Buffett. That’s OK, pitch correction software can do amazing things.

Andy Grewal, The Un-Precedented Tax Court: Bench Opinions (Procedurally Taxing). “Opinions can’t cause a lot of confusion if no one can find them.”

 

Martin Sullivan, As in Florida, Rubio Pursues ‘Big, Hairy’ Goals in the U.S. Senate (Tax Analysts Blog).

TaxProf, The IRS Scandal, Day 740. Today’s post is a useful corrective to the persistent scandal denialists.

Not that there’s anything wrong with that. AICPA Wants CGMA Love From the C-Suite (Caleb Newquist, Going Concern).

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Tax Roundup, 5/14/15: Snowbird fails to melt Iowa Department of Revenue opposition to gain exclusion. And many links!

Thursday, May 14th, 2015 by Joe Kristan

 

Programming note: No posting tomorrow. See you Monday!

 

Iowa's business tax climate, illustrated

Materially-participating in winter

Snowbird loses “material participation” Iowa capital gain exclusion argument. A taxpayer who claimed the unusual Iowa exclusion on very-long-term capital gains failed to convince the Department of Revenue that he “materially participated” in the activity for the minimum of ten years required to qualify for the exclusion.

Iowa allows taxpayers to exclude certain long-term gains from their Iowa taxable income if they meet two requirements:

– They have held the property for ten years, and

– they “materially participated” in the business sold (or in the business holding real property sold) in the ten years preceding the sale.

The “material participation” rule follows the federal “passive activity” material participation definitions. This usually is based on time spent in the activity. Farmers who materially participate in five of the last eight years before they start drawing Social Security payments are considered to materially participate in the farming activity forever. Other taxpayers who retire after working in a business generally are considered to “materially participate” for five years after retirement.

The Iowa ruling letter gives sketchy facts, but it does note (my emphasis):

In determining material participation, only the 10 calendar years immediately prior to the sale are considered and the determination of the participation is limited to that property which is sold.  Both the Department’s rule and the Internal Revenue Code (IRC) require material participation to be regular, continuous, and substantial.  The fact that you wintered in Florida lends serious doubt as to the regular part of that requirement.  Additionally, your daughter was paid for management services.  Rule 701 IAC 40.38(1)(e)(7) states in part, “Management activities of a taxpayer are not considered for purposes of determining if there was material participation if either of the following applies: any person other than the taxpayer is compensated for management services, or any person provides more hours of management services than the taxpayer.”

The letter goes on to say that it’s up to the taxpayer to prove participation, and the taxpayer failed to provide logs, calendars or other evidence that he worked sufficient hours to meet the material participation tests.

The moral? If you want to claim material participation, and you have stepped away from the business, it’s important to keep good records of your participation. The state may not be inclined to take your word for it.

Cite:  Document Reference: 15201008

Related:

Material Participation Basics

IOWA’S SUPER-LONG TERM CAPITAL GAINS DEDUCTION: IF YOU QUIT, DON’T WAIT TOO LONG TO RETIRE

 

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Kay Bell, Don’t ignore that IRS letter and nine other tax notice tips

Robert Wood, Facts About FATCA, America’s Global Disclosure Law. “If you think money anywhere can escape the IRS, think again.”

Jim Maule, When Do Relationships End for Federal Income Tax Purposes?:

The taxpayer argued that the child remains her foster child because they continued their relationship and hold each other out as parent and child. The Tax Court, however, determined that the taxpayer’s guardianship terminated in 2004 when the child attained majority. At that point, the child no longer could be said to be someone who “is placed” with the taxpayer.

Interesting.

 

Robert D. Flach, NO INCOME IS TAXED ALONE

Andrew Mitchel has a new Flowchart – Taxation of Pension Distributions Under UK – US Income Tax Treaty

 

Cara Griffith, Learn to Love the Property Tax — It’s Not So Bad (Tax Analysts Blog):

Despite its bad reputation, the property tax has numerous benefits. For local governments, the tax provides a relatively stable source of revenue. Local governments also have a fairly high collection success rate. Many property owners have escrow accounts through their mortgage companies, which collect tax monthly and remit it at the appropriate time. Because of that, and the fact that the property tax is attached to something physical, it is hard to avoid or evade.

It’s hard to beat the property tax for funding local services. When the politically-influential carve themselves out of it with TIFs or special exemptions (e.g., special agricultural assessment rules), those that are left footing the bill are understandably unhappy.

 

Renu Zaretsky, Wishes, Dreams, and Bittersweet Denials Today’s TaxVox headline roundup covers thoughts on the effect of reduced refunds on this spring’s retail sales, the failure of a proposed soda tax in California, and the need for more IRS authority to fix bad EITC claims.

Alan Cole, NFIB Survey: Taxes a Top Problem for Business (Tax Policy Blog).

Carl Smith, IRS Plays Cat and Mouse With Tax Court on Its Constitutional Status (Procedurally Taxing).

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Joseph Thorndike, Even Under a Flat Tax, Learn to Love Those Loopholes, Because They’re Here to Stay (Tax Analysts Blog). “Once you win the battle, you have to keep fighting it over and over again.”

Greg Mankiw, Why I invest in index funds. “For investors, 2014 was the sixth consecutive year that hedge funds have fallen short of stock market performance, returning only 3 percent on average.”

Hank Stern, Cover Cali sputtering. (InsureBlog). “The Golden State’s health exchange (Covered California) continues to burn through tax-payer dollars at an alarming rate.”

 

TaxProf, The IRS Scandal, Day 735

 

Career Corner. Should CPAs Consider an MBA? (Paul Gillis, Going Concern). Not to fix your car, no.

 

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