Posts Tagged ‘Robert Wood’

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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Tax Roundup, 4/27/15: Iowa’s corporate rate highest, even after you do the math. And more!

Monday, April 27th, 2015 by Joe Kristan

The Highest. How High Are Corporate Income Tax Rates in Your State? (Jared Walczak, Richard Borean, Tax Policy Blog):

Corporate income taxes vary widely, with Iowa taxing corporate income at a top rate of 12.0 percent (though the state offers deductibility of federal taxes paid), followed by Pennsylvania (9.99 percent), Minnesota (9.8 percent), Alaska (9.4 percent), the District of Columbia (9.4) and Connecticut and New Jersey (9.0 percent each). At the other end of the spectrum, North Dakota taxes corporate income at a top rate of 4.53 percent, followed by Colorado (4.63 percent), and Mississippi, North Carolina, South Carolina, and Utah (5.0 percent each).

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So how much does that federal deductibility lower Iowa’s top rate? If you compute the top rates taking into account the deduction, Iowa still has a top marginal rate of 10.11% — still highest in the nation.

The high rate doesn’t result in high revenue receipts for the state. For example, Calendar 2013 corporation tax revenue for Iowa accounts for less than 6% of the state’s tax receipts. With single-factor apportionment and a tax base hollowed out by special interest carveouts, it hits hardest unlucky taxpayers without pull at the statehouse. Yet, as the U.S. has the highest national corporation tax rate in the OECD, it secures Iowa the dubious honor of having the highest corporation tax rate in the developed world.

 

William Perez, Tax Incentives for Alternative Energy Systems

Annette Nellen, Revenue magic (that should be avoided)

Kay Bell, Virginia dumps tax refund debit cards for paper checks. Fraud is part of the reason.

Paul Neiffer, Think You Are Too Small to Be a Target of Cyber Crime? Think Again. “30% of all targeted cyber-attacks are directed against businesses with less than 250 employees.”

Jason Dinesen, Marriage in the Tax Code, Part 7: 1920s Court Battles

Keith Fogg, Last Known Address for Incarcerated Persons (Procedurally Taxing). Funny that the government can insist that a taxpayer partake of its hospitality, but then take no responsiblity to see that he gets his tax notices.

Robert Wood, IRS Paid $3 Billion In Tax Credit Mistakes Plus $5.8 Billion In Erroneous Refunds. That doesn’t count erroneous earned income tax credits — only corporate returns.

Russ Fox, No Discount for her Sentence. “Well, Ms. Morin operated Discount Tax Service. Her clients were very happy with her methods, as they received tax credits and itemized deductions on their returns whether or not they qualified for them.”

Tony Nitti, Tax Savings To Clear Path For Josh Hamilton’s Return To Texas Rangers. But people keep telling me that state taxes don’t affect business decisions.

Robert D. Flach, YOU CAN’T MAKE THIS STUFF UP. “The IRS was writing to the taxpayer to tell him that he is dead and so they were not going to process his refund.”

 

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Me, IRS releases Applicable Federal Rates (AFR) for May 2015

 

Peter Reilly, IRS Forced To Release Names Of Targeted Groups. The IRS likes to hide its misdeeds behind the taxpayer confidentiality rules. Not this time.

TaxProf, The IRS Scandal, Day 718The IRS Scandal, Day 717The IRS Scandal, Day 716The IRS Scandal, Day 715.

Howard Gleckman, Could a Carbon Tax Finance Corporate Rate Cuts?

Robert Goulder, Bernie Sanders: Swimming Against the Tide (Tax Analysts Blog). We can only hope so.

Because he would lose? Bush Nomination Would Be Bad News for Tax Reformers (Martin Sullivan, Tax Policy Blog).

 

Career Corner. Dealing with chatty colleagues (Caleb Newquist, Going Concern). When feigning death isn’t enough.

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Tax Roundup, 4/23/15: House report rips Koskinen’s war on taxpayer service.

Thursday, April 23rd, 2015 by Joe Kristan

I’ll believe the IRS has a funding crisis when the IRS acts like it has a funding crisis. The House Ways and Means Committee yesterday issued a report ripping Commissioner Koskinen for deliberately cutting customer service to prioritize ACA implementation and to create pressure for a bigger budget. It’s the IRS version of the Washington Monument Strategy — slashing the most visible and popular services first.

This Koskinen isn't the IRS commissioner, but he'd probably do a better job than the one who is.

This Koskinen isn’t the IRS commissioner, but he’d probably do a better job than the one who is.

Christopher Bergin of Tax Analysts describes the report:

In 14 pages, the report blisters the IRS for treating taxpayers like dirt (my term, not theirs). It’s a shrewd counterpunch in the mouth. But remember, the commissioner picked this fight.

What’s in the 14 pages? A discussion of items that Mr. Koskinen chose to fund, and resources he neglected, at the expense of taxpayer service. Examples from the report include:

Diversion of user fee money to the general budget. The IRS has jacked up the fees to obtain rulings and non-automatic accounting changes to absurd levels. Rather than using those fees to provide services, the funds have been diverted to the general IRS budget.

Continuing to keep hundreds of full-time union operatives on the agency payroll. From the report.

“…the IRS reported that employees used 521,725 hours for union activity in fiscal year 2013, which accounted for an estimated $23.5 million in salary and benefits expenses. In fiscal year 2014, the IRS recorded 491,948 hours of union time, and another $23.5 million in salary and benefits expenses. In that same fiscal year, there were 36 IRS agents who devoted 50 percent or more of their time at work to union activities instead of performing official duties. For the first quarter of fiscal year 2015, the IRS reported 113,294 hours of union time.

The report says that at 15 minutes per call, these employee slots could have fielded 2.5 million taxpayer inquiries. But then the union would have to pay its own employees, and we can’t have that.

The report also notes that the IRS hasn’t exactly shown it would make good use of additional funds, citing its expensive internal system implementation failures. It also slams the IRS for ending the pilot private collection program, while failing to pursue the collections targeted under the pilot program. Of course, the Treasury Employee Union would rather have the work not done at all than to have it done by non-union help.

I agree with Christopher Bergin in attributing the mess to Mr. Koskinen:

Almost from the first day on the job, his reaction to congressional budget cuts has been to deflect responsibility elsewhere. His appearances before Congress have a “who do you think you are” edge to them. And this tax filing season, he upped the ante.

His new strategy went something like this: “You want to cut my budget, fine — then I’ll show you what it will cost.”

He began cutting back on taxpayer service and tax law enforcement,

Via Wikipedia

Via Wikipedia

claiming that the IRS lacks sufficient funds to do its job. Never mind that its annual budget is about $11 billion. Then Koskinen started telling his employees the country must get used to the IRS doing “less with less.” That language is code for “taxpayers are going to suffer and Congress will get the blame.”

He then doubled down on the rhetoric by labeling budget cuts a “tax cut for tax cheats.” Personally, I think that remark went too far. It resembles a temper tantrum — or worse.

And you know what? The commissioner of the Internal Revenue Service doesn’t get to throw a public temper tantrum. It’s simply not a part of the job description.

As long as the IRS can afford to keep a battalion of union operatives on its payroll, I’ll remain unconvinced that it really needs a bigger budget. I’m convinced that until Mr. Koskinen resigns, there is no hope for the agency.

Somewhat related: Russ Fox, Don’t Call Us Continues. “If anyone thinks the IRS’s budget will be increased for next year, they’re dreaming.”

The TaxProf has a roundup of coverage.

 

What’s “green” about green energy subsidies. An Indiana man pleads guilty to taking part in a conspiracy to scam the biofuel subsidy system. Prosecutors said the scam raked in over $100 million in refundable biodiesel production credits.

Of course, scams are bad, but the real scandal of the biofuel subsidies is what is legal.

 

William Perez, Tax Incentives for Alternative Energy Systems

 

Jason Dinesen, Tax Season Recap 2015: What a Strange Season, Part 2 (Trends I Noticed)

Peter Reilly, Detective’s Vacation And Sick Time Not Excluded From Taxable Income

Robert Wood, What To Do When IRS Agents Call On You. “This may sound paranoid, but the ramifications of getting flustered and running at the mouth can be extreme.”

TaxProf, The IRS Scandal, Day 714.

 

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Iowa rural broadband bill advances. O. Kay Henderson reports:

The Iowa House has passed a bill that would set up a state-run grant program to expand broadband access in Iowa, although no state money is committed and the program will only get going if the state gets federal tax dollars for it. The bill would set up a new, 10-year-long property tax exemption for companies that extend high-speed broadband service in “unserved or underserved areas” of the state.

Of course. How can you do anything without a tax bill? This item in the article strikes me:

Representative Josh Byrnes, a Republican from Osage, said the bill will hopefully address the “inconsistencies” in broadband speeds.

“I live in a part of Mitchell County where I actually get better connectivity to my barn than I get here at the state capitol,” Byrnes said.

Of course, the state capitol is in the most urban part of the state, which is also a rising tech corridor. If you can get better broadband in a Mitchell County barn, I have doubts about how serious the rural broadband problem really is.

 

TaxGrrrl, Accused Murderer Requests Police Escort To Cash Tax Refund. Jails apparently don’t cash refund checks.

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Tax Roundup, 4/14/15: Some things extend, some things don’t. And: IRS offers crummy service, blames preparers.

Tuesday, April 14th, 2015 by Joe Kristan

Yes, extensions are your friend. But not everything extends.

No Walnut STApril 15 is do-or-die day for these things:

– Paying at least 90% of your 2014 tax, to avoid the 1/2% (+ 1/2% per each additional month) underpayment penalty.

– Funding a 2014 IRA contribution.

– Funding a 2014 Health Savings Account contribution.

– Paying a first-quarter 2015 federal estimated tax payment.

– Making a “mark-to-market” election for 2015 trading gains and losses.

– Claiming a refund for taxes paid on an unextended timely-filed 2011 1040.

 

Still, many important things are extended with a timely extensionForm 4868 for 1040s, Form 7004 for partnerships, trusts and most other things. Among them:

– The 1040 itself, enabling you to avoid the 5% failure to file penalty — plus an additional 5% per month until filing, up to a maximum 25%.

– Form 1041 for trusts and Form 1065 for partnerships — avoiding a $195 per K-1, per month late return penalty.

– Funding a 2014 Keogh or SEP retirement plan.

– Withdrawing excess 2014 IRA contributions.

– Filing a Form 3115 for an automatic accounting method change, including the “late partial disposition election” allowing “biblical” deductions for prior-year real-estate expenditures.

– Getting a qualified appraisal for a 2014 non-cash charitable contribution)

– Closing 2014 like-kind exchanges entered into after October 18 (to up to 180 days from the day you gave up the property you are exchanging).

– Many tax return elections are extended when the return is extended, including Section 754 elections to step up partnership basis (yes, partnership returns are also due on April 15).

So extend your return by all means. Just don’t miss a deadline you can’t extend.

Tomorrow is the last day of 2015 filing season; return for our last 2015 Filing Season Tip!

 

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Kay Bell, 5 last-minute tax filing tips

TaxGrrrl, 5 Ways To Pay Your Tax Bill Now

William Perez, What to Do if You Owe the IRS

Paul Neiffer, Watch Out for Employment Tax Fraud. “To prevent this type of fraud, it is extremely important to either completely control the process of remitting these funds to the IRS (i.e. do it yourself) or make sure you are dealing with a reputable firm.  The Treasury Department just issued a report indicating the safeguards that the IRS and employers should implement.”

 

TaxProf, The IRS Scandal, Day 705

Robert Wood, Lois Lerner Emails Defend Targeting, Warn IRS Employees Emails Can Be Seen By Congress. No scandal here, though!

 

Andrew Lundeen, Tax Complexity Is Expensive for Small Businesses (Tax Policy Blog). “Nearly a quarter of small business owners in the United States spend over 120 hours each year dealing with their federal taxes, according to the most recent survey by the National Small Business Association.”

Tony Nitti, What Hillary Clinton’s Voting Record Reveals About Her Tax Plan

 

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Well, IRS, you’re not exactly saving the world yourself. IRS to Tax Pros: You’re Not Helping (Caleb Newquist, Going Concern):

“Each filing season, the e-help desk receives phone calls from taxpayers because their tax preparer referred them for assistance resolving rejected returns, tax law and tax account matters,” said the IRS in an email to tax professionals Monday. “This increases the taxpayer’s burden and causes lengthier delays for everyone. The e-help desk cannot help these callers and must direct them to other sources for assistance—typically IRS.gov including Publication 5136, IRS Services Guide.”

You know why we have taxpayers call you? Because you won’t talk to us without a power of attorney, which we can’t always get from them in a hurry. If you would let preparers resolve routine issues for taxpayers, maybe we wouldn’t have to ask taxpayers to ask you to do your job quite so much.

 

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Tax Roundup, 4/13/15: Tips for those caught cash-short for April 15. And: bad tax policy, the busybody’s friend!

Monday, April 13th, 2015 by Joe Kristan

dimeI owe how much? As April 15 approaches, more taxpayers than usual are finding that not only is no refund on its way, but they are supposed to send the IRS more money. For many, it’s because they are required to repay the advance premium credit on their Obamacare policies. For others, they just didn’t have enough withheld from their taxes. Whatever the cause, it’s a cash problem they can’t solve over the next three days. What to do?

First, make sure you either file or extend by Wednesday. The problem of owing the IRS money doesn’t go away by ignoring it. In fact, it can get a lot worse.

If you file a return (or extension) and don’t pay at least 90% of the tax owing, the penalty is 1/2% per month, plus interest, on the amount due — the “failure to pay” penalty. But if you don’t file or extend, then you get the 5% per month “failure to file” penalty, plus interest, on the underpayment, maxing out at 25%. That can make a big difference.

Also, if your underpayment is solely the result of repayment of the premium tax credit, the IRS is waiving the failure to pay penalty, as long as you file or extend timely.

Pay what you can. If you can pay 90% of what you owe, then you only pay interest on the balance at the IRS underpayment rate, currently 3% annually. That’s significantly better than the approximately 8% combined interest rate and underpayment penalty.

Consider borrowing. If you have a home equity line, that can be a good deal. The rates will likely be competitive with the IRS rates, especially taking penalties into account — and unlike IRS debt, you can deduct interest on most home equity loan payments.

Watch your rates. While you want to pay the IRS down, there are worse creditors. You don’t want to take a credit card cash advance or car title loan at 18% to pay off the IRS at 3-8%. But if that is competitive with what your credit card charges, use the card. Credit card companies are easier to deal with than IRS collections. The can be reached by phone, for one thing.

20140321-4Take advantage of a 120-day grace period the IRS offers. There is a toll-free number (800-829-1040), but you are likely to have better luck using the IRS Online Payment Agreement Application.

Consider an IRS “installment agreement.” If you owe under $50,000, you can fill out the request online and get a monthly payment plan going. There is a $120 user fee. Once you get on the plan, be prepared to stick with it, as they can get unpleasant if you default. If you owe more than $50,000, you probably need a tax pro. You don’t think you need one? Come on, you owe more than $50,000, that should tell you that you aren’t doing a great job of tax planning on your own.

Fix the problem for 2015. Many two-earner couples chronically under-withhold. If you and your spouse each have six figure incomes and you are both withholding at 15% or less, you shouldn’t be surprised that you are paying on April 15.

IRS resources:

Tips for Taxpayers Who Can’t Pay Their Taxes on Time.

Ways to Pay Your Federal Income Tax

Three days left – that means after today there are only two more Tax Update . Don’t miss a one!

 

 

20140321-3Russ Fox, Bozo Tax Tip #1: Let Your IRS Notice Age Like Fine Wine!. Like I said, ignoring them won’t make them go away.

William Perez, 8 Reasons to Ask the IRS for a Tax Extension. Good reasons.

TaxGrrrl, 5 Things Taxpayers Are Irrationally Afraid Of – And Shouldn’t Be

Tony Nitti, IRS To Waive Penalties For Taxpayers With Delayed Or Inaccurate Obamacare Insurance Information. Again, this releif is only available if you file or extend on time.

 

Kay Bell, Obamacare, NYPD donations offer new tax considerations

Annette Nellen, Challenges of taxing gambling winnings. Winnings above the line, losses are itemized deductions. What’s wrong with this picture?

Jason Dinesen offers Tips for Choosing Bookkeeping Software

Peter Reilly, Tax Court Allows Multimillion Multiyear Arabian Horse Losses

Robert Wood, 10 Notorious Tax Cheats: Real Housewives Stars Teresa And Joe Giudice Faced A Staggering 50 Years

 

Jack Townsend, Taxpayer Right to Be Present at Interview of Federally Authorized Practitioner. “Therefore, the Court concludes that a taxpayer does not have an absolute right to be present at a third party IRS summons proceeding concerning the taxpayer’s liabilities.”

7-30 fountain

 

TaxProf, The IRS Scandal, Day 702Day 703Day 704. From Day 704: “Lois Lerner, former director of the Exempt Organizations Unit at the Internal Revenue Service (IRS), warned other IRS officials that lower-level employees ‘are not as sensitive as we are to the fact that anything we write can be public–or at least be seen by Congress,’ according to documents obtained by Judicial Watch and released on Thursday.” Because she had nothing to hide, of course.

 

Alan Cole, Taxes Are Not Handouts (Tax Policy Blog):

At times I really struggle to understand the way taxes are covered on Wonkblog, but a post yesterday, listing government handouts for the rich, reached a new level.

Some of the items listed seem like poor examples. (Do rich people really take lots of deductions for their gambling losses?) But the one that really threw me for a loop was the estate tax, a tax levied on only the most valuable estates. It is literally the opposite of a handout for the rich.

When start from the premise that everything is a handout for the rich, then you can believe just about anything. Like this next guy:

Richard Phillips, What We Know About Hillary Clinton’s Positions on Tax Issues (Tax Justice Blog) “Taken together, Clinton has frequently shown a willingness to take a stand for tax fairness but has never fleshed out a clear agenda on these issues and has occasionally embraced regressive or gimmicky tax policies.” Of course, the the “tax justice” crowd, “fairness” is just another word for taking your money.

 

David Wessel, How much does the tax code reduce inequality? (TaxVox). “n other words, the U.S. tax system does reduce inequality, but there’s still a lot of it left after taxes.”

Poverty is a problem. Inequality isn’t the same thing, and if you are more worried about inequality, your priorities are misplaced.

 

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David Brunori is my favorite tax policy commentator ($link):

There is a theory that says the tax laws should be used to do one thing — raise revenue to pay for public services. Taxes should not be used to engineer society, promote social agendas, foster economic development, or help anyone in particular. This theory has merit. Adherence would lead to less cronyism, fewer economic distortions, and less regulation through the tax code. State governments, of course, violate these principles all the time.

Who are the perpetrators? Those striving for bad tax policy represent an odd coalition of people who want to run your life, and people who simply want your money.

Extra points to David for correctly distinguishing a “blog” from a “blog post.” A blog contains posts, and a single post isn’t a “blog.” Now get off my lawn.

 

Career Corner. Long Hours Are the Root of All Your Busy Season Problems (Caleb Newquist, Going Concern). If you think you have a problem working long hours, try getting these things done without working long hours.

 

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Tax Roundup, 4/10/15: The Iowa tax credit that breaks hearts. And: IRS budget cut crocodile tears!

Friday, April 10th, 2015 by Joe Kristan
Flickr image courtesy Alexander Marie Guillemin under Creative Commons license

Flickr image courtesy Alexander Marie Guillemin under Creative Commons license

Stimulate them young. By my count, Iowa’s tax law has at least 31 tax credits designed to stimulate economic activity in one way or another. There’s another tax credit with stimulative potential that Iowans tend to forget: the tax credit that encourages you to send your high-schooler to the prom.

Any prom parent, or anybody who has gone to one, knows that proms require a flurry of economic activity, from dresses and tuxes to the cost of a nice dinner out. While those items don’t get a tax break, the Iowa tax law at least helps buy the ticket to the great event itself.

Iowa’s “Tuition and Textbook Credit” is a 25% credit on up to $1,000 of qualifying K-12 expenses. Yes, tuition and textbooks count. So do activity costs (my emphasis):

Annual school fees; fees or dues paid for extracurricular activities ; booster club dues (for dependent only); fees for athletics; activity ticket or admission for K-12 school athletic, academic, music, or dramatic events and awards banquets or buffets; fees for a physical education event such as roller skating; advanced placement fees if paid to high school; fees for homecoming, winter formal, prom, or similar events; fees required to park at the school and paid to the school  

Just as many young men today neglect some of the little things that can make a difference on a prom date between happiness and heartbreak, many taxpayers neglect to keep track of the little school fees that can add up to a $250 savings on their Iowa income tax. In addition to prom tickets, instrument rentals, school district drivers education fees, fees for field trips and transportation, band uniform costs and some athletic equipment costs also qualify. Click here for a more complete list.

Related: Prom tickets, rentals qualify for state tax credit (KCCI.com, in which you can see me sort of explain this on actual video).

This is another of our daily 2015 Filing Season Tips running through April 15. Six more to go!

 

"Nile crocodile head" by Leigh Bedford. Via Wikipedia

“Nile crocodile head” by Leigh Bedford

Christopher Bergin, Crocodile Tears for IRS Budget Cuts (Tax Analysts Blog):

Don’t get me wrong — I personally disagree with recent IRS budget cuts. They are not sound tax policy. They also strike me as being politically motivated payback for the Lois Lerner episode. That’s myopic on the part of congressional Republicans. It’s as if they’re demanding their pound of flesh regardless of the adverse consequences to millions of taxpayers.

But I’m equally disappointed with how the IRS has chosen to respond. Rather than rise to the occasion, it has resorted to a blame game. Congress didn’t give us the budget we wanted, so the first things to go are taxpayer service and enforcement. Conflict over agency funding is nothing new in Washington. What’s remarkable here is the blatant manner in which American taxpayers are being held hostage.

Commissioner Koskinen has only himself to blame. His tone-deaf and intransigient response to the Tea Party scandal gave GOP appropriators only more reasons to distrust the agency. Only a new Commissioner can start to repair the damage.

Howard Gleckman, What Will Happen To Voluntary Tax Compliance If a Budget-constrained IRS Is Not Fixed? (TaxVox)

 

20140507-1Russ Fox, Bozo Tax Tip #2: The Eternal Hobby Loss. “If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware!”

William Perez, 7 Ways to Pay the IRS

Kay Bell, 10 tax sins of commission that could be quite costly

Sean AkinsDark Matter: When to Seal the Tax Court Record (Procedurally Taxing)

Robert Wood, Best And Worst Tax Excuses To Fix IRS Penalties, “Relying on a professional tax adviser is one of the classic excuses.”

 

Roger McEowen, The Perils of Succession Planning (ISU-CALT). “Most U.S. businesses are family-owned, but statistics show that only about 30 percent of them survive to the next generation and only about 12 percent to the third generation.”

I firmly believe there is no need for a heavy estate tax to break up dynastic wealth. All you need are beneficiaries.

 

Alan Cole offers A Friendly Reminder That Pass Through Businesses Exist (Tax Policy Blog):

Every once in a while we see blog posts from other tax research organizations, or even congressional offices, puzzled over the low collection of corporate taxes relative to GDP or relative to other tax revenues. Today we have another such post, from Citizens for Tax Justice. I believe I can allay that confusion.

It’s not confusion, it’s political mischief.

 

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Tony Nitti, Rand Paul Announces Presidential Bid, Favors Flat Tax. “Flat tax proposals come in many forms, and range from exceedingly simple to nearly as complex as the current law.”

Richard Phillips, Rand Paul’s Record Shows He’s a Champion for Tax Cheats and the Wealthy. (Tax Justice Blog). I’ll translate that: he thinks taxpayers are entitled to keep some of their money, and to a little due process. To the “tax justice” crowd, anything that keeps the government out of your pocket for any reason is cheating.

 

Caleb Newquist, #TBT: The Failed Merger of Ernst & Young and KPMG. I remember the abortive merger between Price Waterhouse and Deloitte Haskins & Sells. Price Sells would have been an awesome firm name.

 

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Tax Roundup, 4/9/15: April 15 is also a day-trader deadline. And: Grant 1, Lee 0.

Thursday, April 9th, 2015 by Joe Kristan

daydrinkersTechnology has made made sophisticated stock trading tools that exchange floor pros once could only dream of available to every home. It has democratized the ability to make, and lose, money playing the markets.

It can be tempting to chuck the desk job and run off with Maria Bartiromo and TD Ameritrade. Sadly, more than one trader has emerged from the relationship with nothing to show for it but a lifetime of capital loss carryforwards.

That’s where today’s filing season tip comes in. If you qualify as a “trader,” April 15 is your deadline for choosing whether to make the “mark-to-market election” on your trading positions for 2015. If you don’t qualify as a trader, you can’t make the election.

If you make the mark-to-market election, you are required to recognize all of your open positions at year-end on your tax return as if you had cashed them out. More importantly, all of your gains and losses are ordinary, rather than capital.

That may seem like an inherently bad idea. Aren’t capital gains taxed at a lower rate? Yes, they are, but only if they are long-term, on assets held for over one year. That’s not the kind of gain day-traders are going for. Short-term gains are taxed at the same rates as ordinary income.

Ordinary losses, on the other hand, are a good thing. Well, on your tax return, anyway, if not in any other way. While individual capital losses are deductible only against capital gains, plus $3,000 per year, ordinary losses are fully deductible, and can even generate loss carrybacks.

That makes the mark-to-market election useful for day traders. They give up capital gain treatment that they can’t use anyway, and if they have a bad year — and many beginners do — they at least get to deduct all of their losses. For example, a famous trial lawyer who left the bar for day trading used the mark-to-market election to deduct $25 million in losses.

It’s already too late to make the election, also known as the “Section 475(f) election, for 2014. But you have until April 15 to make the election for 2015. You make the election either with either an unextended 2014 1040 or with the Form 4868 extension for the 2014 return. You may not make the election on an extended 1040.

The election is made on a statement with the following information:

  1. That you are making an election under section 475(f);
  2. The first tax year for which the election is effective; and
  3. The trade or business for which you are making the election.

So if you are spending your days with CNBC and your trading program, you might want to hedge your tax risks by making a 2015 475(f) election by April 15.

Related: The lure of a Sec. 475 election (Journal of Accountancy)

This is another of our series of 2015 Filing Season Tips — one daily through April 15!

 

Russ Fox, Bozo Tax Tip #3: Just Don’t File

 

Flickr image courtesy Easa Shamih under Creative Commons license

Flickr image courtesy Easa Shamih under Creative Commons license

Tax Court judges can do math too.We talked last week about the need to properly document charitable deductions.  The Tax Court talked about it yesterday, disallowing claimed deductions of $37,315 for lack of substantiation — most of it for purported contributions of household goods. From the decision:

Petitioners did not provide to the IRS or the Court a “contemporaneous written acknowledgment” from any of the four charitable organizations. Petitioners produced no acknowledgment of any kind from the Church or Goodwill. And the doorknob hangers left by the truck drivers from Vietnam Veterans and Purple Heart clearly do not satisfy the regulatory requirements. These doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.

So if you claim property deductions for gifts of $250 or more, you need to have something from the charity that, even if it doesn’t show the value, shows what you gave. So why not claim you just gave only gifts under $250? From the Tax Court (my emphasis):

Petitioners contend that they did not need to get written acknowledgments because they made all of their contributions in batches worth less than $250. We did not find this testimony credible. Petitioners allegedly donated property worth $13,115 to the Church; this donation occurred in conjunction with a single event, the Church’s annual flea market. Petitioners’ testimony that they intentionally made all other contributions in batches worth less than $250 requires the assumption that they made these donations, with an alleged value of $24,200, on 97 distinct occasions. This assumption is implausible and has no support in the record.

Hey, I drive a Smart car, it takes a lot of trips!

Cite: Kunkel, T.C. Memo 2015-71.

 

20140401-1Jana Luttenegger Weiler, Special Tax Deduction for Contributions to Support Families of Slain NY Officers. (Davis Brown Tax Law Blog). A 2014 deduction that you can still fund today.

TaxGrrrl, Taxes From A To Z (2015): Z Is For Zloty. On paying taxes while abroad and you need to use a foreign currency.

Robert Wood, Newest Tax Fraud Threat? Your Payroll Tax. A good reminder of the need to use EFTPS to monitor your payroll tax service, to make sure your company payroll taxes are getting deposited with the government.

Jason Dinesen, Marriage in the Tax Code, Part 6: Community Property Laws

Kay Bell, IRS headquarters hit by brief Washington, D.C., power outage. A reminder that even if you e-file, you don’t want to wait until the very last minute.

William Perez, Requesting Additional Time to File a State Tax Return

Jack Townsend, Tax Shelter Salesman Avoids Fraud Finding for Investment in Tax Shelter. You’ll have to follow the link for the more accurate, but less printable, version of the headline.

 

David Brunori, Greed, Piracy, and Cowardice (Tax Analsyts Blog):

I have written about 100 articles on tax incentives, all of them critical. I don’t blame the “greedy” corporations. State and local taxes are a relatively small part of the cost of doing business. Corporations are handed opportunities to minimize their tax burdens — legally. And rationally, they take advantage of those opportunities. The biggest factors in deciding where to invest are labor costs and broad access to markets. If we ended all tax incentives tomorrow, there would be virtually no effect on the economy. Corporations would still be investing where they are investing.

It’s politicians responding to the incentives. Those of us who want better tax policy, broad tax bases, and low rates for all don’t show up at the legislator’s golf fund raisers. Those looking for a special deal for their company or their industry have low handicaps for a reason.

 

TaxProf, The IRS Scandal, Day 700. 700 days, no scandal here, move along.

 

Bloomberg, An Emotional Audit: IRS Workers Are Miserable and Overwhelmed. A visit to one of the few places where they still offer on-site service. (Via the TaxProf)

 

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History alert. General Lee surrended to General Grant 150 years ago today at Appomatox Court House, Virginia. Fellow tax blogger Peter Reilly is there, and I am insanely jealous.  I am contenting myself by re-reading Lee’s Last Retreatthe best book I’ve seen about the last frantic days of the Army of Northern Virginia. It makes you feel like you are there with the crumbling confederate army as it tried to escape after shattering defeats around Richmond. It also punctures a lot of romantic myths around those events.

After tax season, I will be happy to bore you with my thoughts on why Grant is grievously underrated for his Civil War achievements, and why he is also an underappreciated president. Next week.

 

News from the Profession: CPA Firm Managing Partner Charged in Embezzlement Scheme (Accounting Today):

Patrick H. Oki, managing partner at the Honolulu-based firm was charged Monday with theft in the first degree, money laundering, use of a computer in the commission of a separate crime, and forgery in the second degree, according to the office of Prosecuting Attorney Keith M. Kaneshiro.

Mr. Oki is reported to be both a CPA and a Certified Fraud Examiner. I can only imagine the awkwardness at the next partner meeting.

 

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Tax Roundup, 4/8/15: It’s all due a week from today. The case for extensions.

Wednesday, April 8th, 2015 by Joe Kristan


4868 bigThe tax deadline is a week from today. An extension might be a great idea. 
It’s all real at your local tax pro’s office. Late nights, new information, complex returns, tight deadlines — all ingredients for something to go wrong. Is it really a good idea for you to want your tax filing to come out of that?

You tax return isn’t a trivial item. That’s why you are paying for it, or why you are spending hours slaving over it. The consequences of a seemingly minor mistake can be shockingly expensive. You own 10% of a Canadian partnership with some fishing buddies and you didn’t report it on the right form? That’s a $10,000 penalty for you!

That’s why it’s unwise to try to rush it through at the deadline, when you can easily get an extension and have it prepared by somebody who has had some sleep and nutrition.

Here are things I hear from people who don’t want to be extended:

This means I will get audited! No it doesn’t. I have seen zero evidence that extending a return increases the risk of audit. I have filed my own 1040 on extension every year since at least 1990, and have yet to be audited (*knocks wood*). A return with a mistake, on the other hand, definitely increases your risk of audit.

But this means they get an extra six months to look at my return! Yes it does. That doesn’t mean much. While I’m sure it’s happened, I have yet to see a case where a taxpayer had to pay an amount on audit on an extended return that wouldn’t have been caught had the return not been exended in 30 years of tax practice. I have seen cases where we were able to get refunds because we found an error on the return three years after the original due date, but before the extended filing date. It can work both ways.

I always file on time! Extended returns are still filed on time. It’s just a different time. This is usually more an assertion of the individual’s self-importance. It really means “you should drop everything else you are doing and finish my return.” It asserts ego over wisdom and practicality.

Now, the positive things about extending:

It gives you more time to make certain tax return elections. Automatic accounting method changes can be filed with extended returns. For many taxpayers, especially those with real estate investments on their 1040, an extension may give your preparer extra time to find new deductions that are “biblical” in scale under the new “repair” regulations. These aren’t available on amended returns.

It may give you more time to fund deductions. If you have a Keogh or SEP retirement plan, extending your 1040 gives you until October 15 to fund your 2014 deductible retirement plan contributions. Remember, though, that some deductions still have to be funded by April 15 even on extended returns, including IRA and HSA contributions.

20150326-3It may give you more time to find deductions. More than one taxpayer has found a charitable contribution receipt or tax payment that they missed when they sent their pre-extension information in.

Extensions may avoid an amended return. It’s not unknown for a taxpayer who is already filed a complex return to get a late K-1 or a 1099 from a new investment that they didn’t think would issue one. That means they have to file an amended return. The IRS does look at these. It’s always better to extend than amend. 

Extensions can turn a 5% per month non-filing penalty into a 1/2% per month late payment penalty. If you are caught short and can’t pay, it’s a lot cheaper to extend than to blow off the payment.

Finally, and most importantly, an extended return is likely to be more accurate. Workload compression is something tax preparers talk about with each other, if not so much in public. Tired people make more mistakes, and that includes preparers. If you really want to attract IRS attention, drop a digit from a six-figure 1099 or K-1 number.

If you extend, you still need to have 90% of your tax paid in when you file Form 4868 to avoid penalties. Many taxpayers extending 2014 returns will include the amount they would pay as their 2015 first-quarter estimate with the extension payment; that payment is due April 15 too, and it gives them a little cushion against surprises on the extended return.

This is another in our series of 2015 Filing Season Tips. Come back every day for a new one through April 15!

 

Russ Fox, Bozo Tax Tip #4: Procrastinate! “What happens if you wake up and it’s April 15, 2015, and you can’t file your tax? File an extension.”

Robert Wood, 9 Innocent Tax Return Mistakes That Trigger IRS Problems. Nine more good reasons to extend and get your return right.

TaxGrrrl, 13 Quirky Beer And Tax Facts On National Beer Day. They say that was yesterday, but any tax pro will tell you it’s really April 15.

Kay Bell, Chaffetz goes after tax-delinquent federal employees (again)

 

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The Des Moines Register reports: Bill advances to exempt bees from sales tax

 The [Iowa] House Ways and Means Committee passed a bill Tuesday that would exclude the sale of honey bees from state sales tax laws.

Honey bees have been the subject of much concern in recent years as their numbers have mysteriously declined. According to the U.S. Department of Agriculture, total losses to managed honey bee colonies was 23.2 percent nationwide during the 2013-2014 winter.

Those honey bee losses – which have been occurring for the last decade – have been linked to many things, including the use of pesticides, disease and loss of habitat.

As far as I know, this is the first time the decline in bees has been linked to sales taxes.

I’m sympathetic to this, in a way, in that I think business inputs should not be subject to sales tax. Still, this is the wrong way to go about it. While I love bees, there’s nothing about apiculture that makes it different from, say, raising earthworms, from a tax policy viewpoint. A group with good lobbyists gets the ball rolling, and everyone else gets left behind.

 

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TaxProf, Brown: The IRS Should Report on Tax Returns Filed by All 535 Members of Congress. I have a better idea: The President, every member of Congress, every cabinet member, and the IRS Commissioner should all have to prepare their 1040s by hand on a live webcast with a running comment bar. The webcasts should be archived on the Library of Congress website, along with the completed tax returns. I think tax simplification would follow in a hurry.

 

Andrew Lundeen, The Estate Tax Provides Less than One Percent of Federal Revenue (Tax Policy Blog). The rich guy isn’t buying.

Howard Gleckman, One Solution to California’s Drought: Tax Water. Oh, so close. How about markets?

TaxProf, The IRS Scandal, Day 699

 

Career Corner. #BusySeasonProblems: Inflatable Sharks; Late-night Checklists; Unexpected Taxable Income (Caleb Newquist, Going Concern).

 

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Tax Roundup, 4/7/15: Dealing with that long-awaited K-1. And: IRS, beacon for Millenials?

Tuesday, April 7th, 2015 by Joe Kristan

My K-1 finally showed up. Now what? Many Tax Update visitors arrive here when they ask their search engines something like “understanding K-1s” or “deducting K-1 losses on 1040.” As more business income is now reported on 1040s via K-1s than on corporation returns, these aren’t trivial questions.

k1corner2014It helps to understand what a K-1 does. “Pass-through” entities — partnerships, S corporations, and trusts that distribute their income to beneficiaries — generally don’t pay tax on their income. The owners pay. The tax returns of the pass-throughs gather the information the owners need to report the pass-through’s tax results properly. Because many different tax items are required to be reported differently on 1040s, the income, deductions and credits of the business have to be broken out on the K-1. That’s why there are so many boxes and so many identification codes on the K-1.

The challenge for the return preparer is to take the information off the K-1 and to report it properly on the 1040. It can get especially complicated when losses are involved.

While anything short of a full seminar will oversimplify the treatment of pass-through items, there are three main hurdles a loss deduction has to clear. They are, in order (follow the links for more detail):

You have to have basis in the pass-through to take losses. Basis starts with your investment in the entity. It includes direct loans to the entity. If you have a partnership, it includes your share of partnership third-party debt. It is increased by earnings and capital contributions and reduced by losses and distributions. If you don’t have basis, the loss is deferred until a year in which you get basis.

There is no official IRS form to track basis, but many pass-throughs track basis for their owners. Check your K-1 package to see if includes a basis schedule.

Flickr image courtesy  Grzegorz Jereczek under Creative Commons license.

Flickr image courtesy Grzegorz Jereczek
under Creative Commons license.

Your basis has to be “at-risk” to enable you to deduct losses. While the at-risk rules are a very complex and archaic response to 1970s-era tax shelters, the basic idea is that you have to be on the hook for your basis, especially basis attributable to borrowings, to be able to deduct losses against that basis. Special exclusions exist for “qualified non-recourse liabilities” arising from third-party real estate loans. Losses that aren’t “at-risk” are deferred until there is income or new “at-risk” basis. At risk losses are computed and tracked on Form 6198.

You can only deduct “passive losses” to the extent of your “passive” income. A loss is “passive” if you fail to “materially participate” in the business. Material participation is primarily determined by the amount of time you spend on the business activity. Real estate rental losses are automatically passive unless you are a “real estate professional.”

Passive losses are normally deductible only to the extent of passive income. The non-deductible losses carry forward until a year in which there is passive income, or until the activity is disposed of to a non-related party in a taxable transaction. You compute your passive losses allowance on Form 8582.

Even if you have income, instead of losses, be sure to use any carryforward losses you might have against it. And consider visiting a tax pro if you find the whole process perplexing.

This is another of our 2015 Filing Season Tips. There will be a new one every day here through April 15!

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Russ Fox, Bozo Tax Tip #5: Ignoring California

TaxGrrrl, Taxes From A To Z (2015): Y Is For Years Certain Annuity

William Perez, Opportunity to Increase Charitable Donations for 2014 under a New Tax Law. “Individuals who donate cash by April 15, 2015, to certain charities providing relief to families of slain New York City police officers can deduct those donate on their 2014 tax return.”

Robert Wood, Beware Tax Mistakes IRS Calls Willful. “Even a smidgen of fraud or intentional misstatements can land you in jail.”

Have a nice day.

I’m from the IRS, and I’m here to help! IRS Agent Causes Grief For Taxpayer’s Spouse By Being Helpful (Peter Reilly)

Kay Bell, Don’t bet on fooling IRS with bought losing lottery tickets.

Leslie Book, District Court FBAR Penalty Opinion Raises Important Administrative and Constitutional Law Issues. “Taxpayers should not be forced to sue in federal court to get an explanation as to the agency’s rationale or the evidence it considered in making its decision.”

Jason Dinesen, It’s Pointless for EAs to Attack CPAs. And vice-versa.

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TaxProf, The IRS Scandal, Day 698

Roger McEowen, Rough Economic Times Elevate Bankruptcy Legal Issues (ISU-CALT)

Martin Sullivan, How Much Did Jeb Bush Cut Taxes In Florida? (Tax Analysts Blog). “So was Jeb Bush a pedal-to-the-metal tax slasher in Florida?”

Renu Zaretsky, It’s Spring Break, and “Everything’s Coming Up Taxes…” (No Daffodils). The TaxVox headline roundup covers IRS budget cuts, reefer madness, and online sales taxes in Washington State today.

 

Career Corner. Do Any Millennials Want to Work at the IRS Non-ironically? (Caleb Newquist, Going Concern). Not very hipster.

 

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Tax Roundup, 4/6/15: I don’t have my K-1 yet. Is that illegal? Or, why K-1s are slower.

Monday, April 6th, 2015 by Joe Kristan

k1corner2014I have my W-2. Why don’t I have my K-1? Tax practitioners hear some version of this every year. The short answer is that employers are required to provide W-2s by the end of January, but most K-1 issuers can legally wait until September 15.

The long answer is that K-1s can be much harder to prepare. For a W-2, you only need to have the wage, withholding and benefit information for the employee — not always super-simple, but usually easy enough with a good payroll system.

To issue a K-1, in contrast, a business has to determine its taxable income, and then it has to determine how to allocate it among its owners. Most businesses don’t even have a clean close on their books until well into January. Many then have their auditors in to opine on the financial statements, sometimes with adjustments that change the results. Then the tax preparers show up.

The tax preparers have to determine where the financial statement books have to be changed to get to taxable income. They have to evaluate elections as to the timing of assets and present them to the business, which then has to make a decision. They may have to prepare accounting method changes that require a review of years of fixed asset additions and disposals. If ownership has changed, they have to determine how the income is to be allocated based on the differing ownership during the year. If property has been contributed, they may have to allocate income and deductions for that property differently than for everything else in the business.

20140321-3Then it’s time for state returns. Every state tax system has its own quirks, and the preparer has to determine whether a business needs to file in a state, how to allocate or apportion the business income to the state, and then to identify where the state computes income differently from federal income.

Oh, and they have to do this for more clients than just the one that issues your K-1.

So it’s not a crime for you to not have your K-1 yet. There are a lot of good reasons, from the complexity to the tax law to the rules that require most K-1 issuers to have their work done at the same time, that delay K-1s. If you are missing a K-1 and April 15 is looming, an extension is likely to be your best option. There’s no evidence that the IRS pays special attention to extended returns, but they definitely notice if you file a return that leaves out a K-1. And you’d much rather file an extended return with a correct K-1 than to amend a return because a K-1 prepared in haste was wrong.

Tomorrow we start to talk about what to do with your K-1 when it does show up as part of our series of , one a day through April 15. Don’t miss a one!

 

Russ Fox, Bozo Tax Tip #6: Nevada Corporations. “If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.”

TaxGrrrl, Taxes From A To Z (2015): W Is For Withholding From Wages

 

William Perez, The Penalty for Not Having Health Insurance

Robert Wood, Know IRS Audit Risks Before Filing Your Taxes. Your audit risk is a lot less if you don’t make a prep mistake. If extending helps you avoid mistakes, extend.

Jack Townsend, Court Approves FBAR NonWillful Penalty Merits But Wants Further Development of APA Issues. ” The IRS disregarded its own promise and assessed the penalty before Mr. Moore could request an ‘appeal.'”

 

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David Brunori has thoughts on state tax incentives ($link):

To the extent blame is to be assigned, it rests solely on our political leaders. Governors, and to a larger extent legislators, have the power to grant or deny incentives. If they adhered to the principles of sound tax policy, they would build tax systems on a broad base with low rates. There would be little, if any, special treatment. But they don’t, because they are driven by two human conditions — greed and fear. They want a big corporation with thousands of employees to move to their state. They believe, incorrectly, that the way to achieve that is to give tax breaks that are unavailable to the rest of us. Conversely, they fear that a company might leave and take the jobs with it. They believe the only way to do that is through the tax code. I have said that politicians are unimaginative cowards when it comes to incentives. I don’t think that is too strong a statement. Of course, we put them in power. So perhaps the real blame lies with us.

The other reason is that nobody shows up at your golf fund-raiser to lobby for broad bases and low rates, but they do when they want a special deal.

 

TaxProf, The IRS Scandal, Day 697Day 696Day 695. Thoughts on how this scandal would have been viewed if it occurred under a President Bush, and a victory for a group suing for a complete list of entities targeted by IRS for their politics.

Jared Walczak, Legislators Take on the Taxing Logic of Nevada’s Live Entertainment Tax (Tax Policy Blog). How Nevada puts musicians out of work.

Annette Nellen, Designing sales tax exemptions – what is necessary?

Robert Goulder, Stateless Income Revisited: Kleinbard, Herzfeld, and BEPS (Tax Analysts Blog)

Richard Phillips, Will this Tax Day be the First and Last Including Premium Tax Subsidies for Millions of Americans? (Tax Justice Blog).

 

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Kay Bell, Mad Men’s Pete Campbell complains about 1970’s tax rates. “In 1970, when the midseason premiere is set, the top tax rate was 70 percent on, for a single filer like Pete, income of more than $100,000.”

Career Corner. Ten Days Until Tax Day: How To Tell Inconsiderate Clients You’ll Be Extending Their Returns (Tony Nitti). “Yet, despite presumably possessing the ability to comprehend the standard Gregorian calendar, here you are, dropping off all of your information mere days before the deadline — just as you did last year, and the year before that — and leaving me a Post-It note thanking me for ‘squeezing you in.'”

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Tax Roundup, 4/3/15: The no appraisal, no deduction rule for big donations. And: Iowa to reconsider forfeiture?

Friday, April 3rd, 2015 by Joe Kristan

Who is going to appraise those bags of clothes? If you’ve prepared tax returns for a long time, you have probably seen something like this in client tax information:

20150402-1Donation, used clothes, Goodwill: $12,000.

In addition to (probably) failing the charitable documentation requirements we discussed yesterday, another shortcoming would be fatal for the deduction: the lack of a “qualified appraisal.” When you make a non-cash donation exceeding $5,000, the tax law requires the filing of Form 8283 supported by a qualified appraisal for the property. Only a few items, including publicly-traded securities, are exempt from this requirement (details here). Otherwise, it’s no appraisal, no deduction. 

The tax law sets strict requirements for a qualified appraisal.  Some relate to the contents and timing of the appraisal report. For example, an appraisal made more than 60 days before the contribution doesn’t work, and the appraisal can’t be received after the due date of the return, including any extensions received. That means you can’t wait for the IRS to audit you to get the appraisal.

The tax law also doesn’t let just anyone do the appraisal. The appraiser must meet minimum credential requirements and regularly appraise the property type at issue. The appraiser also cannot be:

The donor of the property, or the taxpayer who claims the deduction.

The donee of the property.

A party to the transaction in which the donor acquired the property being appraised, unless the property is donated within 2 months of the date of acquisition and its appraised value is not more than its acquisition price. This applies to the person who sold, exchanged, or gave the property to the donor, or any person who acted as an agent for the transferor or donor in the transaction.

Any person employed by any of the above persons. For example, if the donor acquired a painting from an art dealer, neither the dealer nor persons employed by the dealer can be qualified appraisers for that painting.

Any person related under section 267(b) of the Internal Revenue Code to any of the above persons or married to a person related under section 267(b) to any of the above persons.

 

20150403-1Going back to our clothing donation, good luck getting that stuff you dropped off after last year’s spring cleaning appraised now.  But, you say, that wasn’t one $12,000 donation! There were at least 20 garbage bags of stuff. That’s 20 $600 donations. No problem!

Problem. The Treasury Regulations determine whether the $5,000 limit is met using (my emphasis):

the aggregate amount claimed or reported as a deduction for a charitable contribution… for such items of property and all similar items of property… by the same donor for the same taxable year (whether or not donated to the same donee).

So 20 bags of clothes are still one donation.

The IRS, and the courts, are strict about the appraisal requirement. If you’ve donated something worth more than $5,000 to charity and you don’t have the appraisal, extend your return and get one before it’s too late. Remember, no appraisal, no deduction. 

Related: A gold mine, or just a pile of old clothes? 

Come back every day through April 15 for another 2015 filing season tip!

 

Des Moines RegisterCivil forfeiture gets statehouse attention:

The House Government Oversight Committee plans to hold a public hearing regarding Iowa’s civil forfeiture laws as a result of a series of articles published by The Des Moines Register.

Rep. Bobby Kaufmann, R-Wilton, who chairs the committee, said the panel was discussing future speakers at its Thursday meeting when representatives brought up the articles and expressed interest in the issue.

20150403-3It’s good that they’re looking at it, but Mr. Kaufmann may not have fully grasped the nature of the problem:

“After talking with several members of law enforcement, I feel a supermajority of law enforcement are conducting themselves in the best manner possible and I believe they’re following Iowa’s civil asset forfeiture law,” he said. “But there are outlier cases where there should maybe be a higher standard for when people’s cash can be seized.”

I’m not sure that talking with the beneficiaries of the system is really the way to determine whether it’s unjust. I suspect a poll of Vikings loading their longboats with loot and captives would also find a supermajority feeling they were conducting themselves “in the best manner possible.” It’s also not helpful that they are “following Iowa’s civil asset forfeiture law” if the law is a license to steal.

It’s a matter of due process. Civil forfeiture imposes what amounts to outlandish fines without conviction, or even arrest, and it puts the burden of proof on the citizen, whose resources to fight the forfeiture have, conveniently, been seized by the state.

It’s also a matter of incentives. If a law enforcement agency gets to keep what it seizes, and faces no punishment for seizing items unjustly, their incentive is to take stuff unjustly. And that’s what happens.

 

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

Kay Bell, Tax tips for the self-employed small business owner

TaxGrrrl, Taxes From A To Z (2015): V Is For Veterans’ Benefits

 

Jason Dinesen, Should a Business Owner Keep Their Own Books?

 

Peter Reilly, Another Proof That S Corp Can Be Best Choice For Professional Practices:

If you viewed the Tax Court decision in the case of Midwest Eye Center as a wake-up call for people who have highly profitable professional practices inside C corporations, I think you would be mistaken.  The wake-up call was in 1986.  This decision is hitting them over the head with a two by four, particularly coming on top of the Vanney Associates, Inc decision late last summer.

Peter is discussing the case I discussed here.

 

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Stephen Olsen, Summary Opinions for the weeks of 3/06/15 through 3/20/15 (Procedurally Taxing), rounding up courtroom and administrative tax procedure happenings.

Robert Wood, Real ‘Mystic Pizza’ Owner Pleads Guilty To Tax Evasion, Could Face 15 Years. It’s the time of year when tax prosecutors get busy, to motivate the rest of us.

Liz Malm, Michigan House Lawmakers Pass Bill Ending Film Incentive Program (Tax Policy Blog). Unfortunately for Michigan, the bill may not pass.

Howard Gleckman, For Most Households, It’s About the Payroll Tax, Not the Income Tax (TaxVox)

TaxProf, The IRS Scandal, Day 694

 

Career Corner: Going Concern March Madness: The #BusySeasonProblems Championship — Deteriorating Mental Health vs. That Voice Inside Your Head (Caleb Newquist, Going Concern)

 

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Tax Roundup, 4/1/15: No fooling – if you reached 70 1/2 last year, take a distribution by today. And: Freedom on April 17!

Wednesday, April 1st, 2015 by Joe Kristan

IMG_1212They don’t call them “required” distributions for nothing. If you reached 70 1/2 years of age in 2014, first, congratulations! Second, today is the deadline for you to take your first required minimum distribution from your (Non-Roth) IRA or SEP, and, if you have retired, from your defined-contribution retirement plan. The rules for the two types of plans are slightly different.

The tax law doesn’t want your retirement plan assets to be growing tax-free forever. That’s why the RMD rules were enacted. You are required to pull an annual taxable amount out based on your remaining life expectancy, determined by IRS tables.

The first required distribution must be taken by April 1 of the year following the year in which you turn 70 1/2. That means you, if you were born after June 30, 1943 and before July 1, 1944. Subsequent distributions have to be taken by December 31. That means if you are taking your first one today, you’ll need to take another one this year.

If you don’t have a spouse 10 years younger than you, you can compute your IRA distribution at this table. If you do, use this table instead. You will need to know your IRA balance as of December 31, 2014.

And if you don’t take your distribution on time? A 50% penalty tax on the amount you should have withdrawn. That would hurt.

This is the first of our 2015 filing season tips. Come back daily through April 15 for more!

 

Russ Fox, Bozo Tax Tip #9: 300 Million Witnesses Can’t Be Right!:

For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.

Yet, somehow it didn’t land on his 1040. Things went badly.

 

People in Iowa get in tax trouble too. St. Charles man sentenced to prison for filing false tax return (Osceola Sentinel-Tribune).

 

Tax Freedom Day is April 24, The Tax Foundation Announces:

Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. Tax Freedom Day takes all federal, state, and local taxes and divides them by the nation’s income. In 2015, Americans will pay $3.28 trillion in federal taxes and $1.57 trillion in state and local taxes, for a total tax bill of $4.85 trillion, or 31 percent of national income. This year, Tax Freedom Day falls on April 24, or 114 days into the year. 

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The big day is a day later than it was last year. As state taxes differ, states have different Tax Freedom Days. The first one is Louisiana, which arrives tomorrow. New York and Connecticut have to wait until May 13. Iowa celebrates fittingly on my next day off, April 16.

 

William Perez, How Saving for Retirement Can Reduce Your Taxes

Kay Bell, Time to choose between a Roth or traditional IRA

Jason Dinesen, Iowa Adoption Credit and Deduction. “The Iowa deduction for adoption expenses is also still available, and there is a relationship between the credit and the deduction.”

Robert Wood, Five Ways To Audit Proof Your Tax Return Against The IRS. For example, “Don’t claim flaky deductions.”

TaxGrrrl,Taxes From A To Z (2015): S Is For Scams

 

Keith Fogg, Impact of Bankruptcy Determination of Tax Liability on Tax Court Case and on Assessment Timing (Procedurally Taxing). “When a taxpayer goes into bankruptcy, a new forum for tax litigation opens up, or potentially opens up, based on section 505 of the Bankruptcy Code.”

 

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TaxProf, The IRS Scandal, Day 692. Today the TaxProf says that Commissioner Koskinen has put all this unpleasantness behind him:

The IRS has fixed its errors, such as improper extra scrutiny of Tea Party groups, and they won’t happen again, the tax agency’s commissioner said Tuesday.

“The changes are so significant throughout the agency that you could hang a sign out at the front of the headquarters saying ‘Under New Management,’” Internal Revenue Service Commissioner John Koskinen said in a speech at the National Press Club in Washington.

Uh-huh. And there were no more Lerner emails, and the Commissioner had made sure he looked very hard for them.

 

Oh, goody. The Rich Are Finally Paying More in Taxes (Jeremy Scott, Tax Analysts Blog). Oddly, he thinks that’s a good thing. But ultimately, the rich guy isn’t buying. And when you try to smack “the rich,” you are really going after employers.

Source: The Tax Foundation

Source: The Tax Foundation

 

David Brunori, Transparency: Good for the Tax System, Critical for Good Government (Tax Analysts Blog):

Modern state tax policy has been dominated by cravenness and cronyism. But every once in a while, politicians muster the courage to do the right thing. Several proposals have been advancing in legislatures that will bring more transparency to state fiscal systems. I cannot overstate the importance of these measures.

Cronies and cockroaches prefer darkness.

 

Howard Gleckman, Is a Consumption Tax Talk Making a Comeback? (TaxVox)

 

Robert D. Flach emerges from his 1040 cave just long enough to do a little Showboating. He’ll get the reference.

 

That’s not funny! Accountants Ruin Joke (Caleb Newquist, Going Concern)

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Tax Roundup, 3/31/15: Stopping travelers in Iowa for fun and profit. And: more tax credits!

Tuesday, March 31st, 2015 by Joe Kristan

20120703-2Highwaymen with badges. The Des Moines Register is running an excellent series describing the worst public finance innovation in recent decades — civil asset forfeiture. That’s a fancy name for police stealing money from travelers and using the proceeds to fund their own operations, on mere suspicion of wrongdoing by the travelers. The victims have to sue to get it back, and they have to prove they aren’t criminals — turning the normal burdens of proof upside down. That’s expensive and difficult. The result is a terribly-designed tax on the unlucky and the intimidated.

This creates a horrible incentive system. Police can always gin up an excuse to confiscate some traveler’s cash to buy new toys (“scented candles, mulch and tropical fish“) for the department. They then send the travelers on their way, a dead giveaway that they aren’t really fighting crime. Most travelers will be intimidated and drive away without fighting. Even if the traveler wins, nobody is punished for the unjustified seizure.

Today’s installment also shows how this system leads to corruption:

Former Dallas County Sheriff Brian Gilbert was convicted of felony theft for taking $120,000 in cash seized during a 2006 traffic stop.

More recently, Altoona resident Vicki Wharton’s car and some of her money was seized in 2012 by Polk County deputies working with the Mid Iowa Narcotics Enforcement team in a case involving her son.

She fought the forfeiture and managed to get both her car and most of her cash back — minus a few hundred dollars that seemingly disappeared.

Some people assume that anybody traveling with large amounts of cash is up to no good, but there are plenty of horror stories of travelers losing their life savings to thieves with badges to show otherwise. Other cases involve seizure of homes or businesses because, for example, a son was arrested for drug use or a customer used a hotel room for a crime.

While asset forfeiture is likely to be more catastrophic for the victim, it is kindred to highway speed cameras as a corrupt use of law enforcement powers for revenue. It is an inherently unethical, unjust, and third-world way to raise revenue. If you aren’t willing to fund your local Sheriff with property taxes, you shouldn’t ask him to fund himself from passers-by.

Other stories in the Des Moines Register series:

Iowa forfeiture: Forfeiture spending questioned in Iowa, elsewhere

Iowa forfeiture: A ‘system of legal thievery?

 

20120906-1Des Moines Register, Branstad: Iowa ‘blessed’ to have Hy-Vee; defends tax credits.

Gov. Terry Branstad is defending the state’s decision to award $7.5 million in state tax credits to Hy-Vee Inc. at the same time one of the grocery company’s chief competitors in the Des Moines market has closed its doors because of bankruptcy.

I shop at Hy-Vee, and I like them just fine. Still, they are a 100% ESOP-owned, presumably through an S corporation, meaning they pay no income taxes. Do they need tax credits, too? Their competitor Dahl’s won’t get this credit — they died. Iowa-based Fareway isn’t getting this sweet subsidy — let alone Price Chopper, Aldi, IGA, Super-Valu, Target, Trader Joe’s, Whole Foods…

 

William Perez, How to Get a Federal Tax Credit for the Cost of Child Care

TaxGrrrl, As Tax Day Nears, Don’t Panic: File For Extension. Far better to extend than to amend.

Robert Wood, Ten Things You Should Know About IRS Form 1099. “Before you file taxes, collect all your IRS Forms 1099 and pay attention to each one. The IRS sure does.”

Peter Reilly, Exelon Subsidiary Denied Tax Breaks On Three Mile Island Purchase.

Jack Townsend, Swiss Bank Enablers Get Unsupervised Probation and Relatively Light Fines. We need to shoot the jaywalkers so we can wrist-slap the real criminals.

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Kay Bell, It’s clear that all tax exempt categories need to be re-evaluated. Scientology is today’s topic.

Clint Stretch, Who Should Pay for the Mess We’re In? (Tax Analysts Blog)

Renu Zaretsky, Just the Facts, Ma’am: On Filing and Reform. Today’s TaxVox headline roundup covers whether the Rubio-Lee tax plan includes refundable personal credits and the trade-offs of public pension reform.

TaxProf, The IRS Scandal, Day 691. He links to Robert Wood discussing the reflexive strategy of obstruction and lies that has become standard operating procedure in the executive branch.

 

And: Tomorrow we start our run to the end of filing season with our 2015 filing season tax tips. Collect one, collect them all!

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Tax Roundup, 3/30/15: A Year After the Fire Edition. And: Can fraud be accidental?

Monday, March 30th, 2015 by Joe Kristan

Friends, if your 1040 information isn’t in by now, you’re getting extended. 

It’s been a year since the old Younkers Building burned down. It was kitty-corner from our office at 7th and Walnut in Des Moines. Here is what it looked like a year ago:

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And here is the site yesterday:

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The remaining portion of the site is called the Wilkins Building. The old Younkers store was actually three buildings built at different times and connected as one store. The part that didn’t burn down was built about 20 years after the part that was obliterated.

The building was being remodeled into apartments, and the work was well along when the fire broke out in the wee hours. The sprinkler system had not been turned on, and the building went up too quickly for the fire department to do more than keep it from spreading.

The developers intend to remodel the remaining portion as apartments, retail and a restaurant. Seventh Avenue is again open, providing easy access to our office, but Walnut remains closed indefinitely.

Related:

Sunday Morning Skywalks.

Goodbye, Younkers Building.

A VISIT(ATION) TO DOWNTOWN YOUNKERS

DOWNTOWN YOUNKERS PICTURES

 

20150326-2No, you’re not. Two headlines from my Google news feed: Are you accidentally committing tax fraud? And 5 ways you’re accidentally committing tax fraud.

You don’t commit tax fraud “accidentally.” You don’t have to tell yourself “hey, I’ll commit me some fraud” to be a fraudster. But for something to rise to the level of fraud, it has to be more than an accident.

For example, accidentally leaving a $50 1099 off a return isn’t fraud. “Accidentally” omitting one for $1 million just might be, as it’s harder to accidentally forget you made that much.

 

This may be the most depressing tax case I’ve ever seen. From MyFox8.com:

The Parsons are guilty of accepting benefits from the government – benefits intended for Erica – even though Erica was no longer with them.

Erica had gone missing late in 2011, but her disappearance was not reported for nearly two years.

The adoptive mother received 10 years, and the father 8, from a judge convinced they killed their adoptive daughter after years of abuse and covered up the crime to keep collecting her government benefits — on which they failed to pay taxes.

 


tileTaxGrrrl, 
9 Tournament & Tax Tips On The Road To The Final Four. “Betting on the Final Four? Here are a few tax and tournament tips to keep in mind.”

Kay Bell, Some Final Four teams could suffer under seat tax proposal. A proposal to reduce deductions for contributions that get you good seats at the game.

William Perez, What Is the Alternative Minimum Tax?

Jana Luttenegger Weiler, 529A ABLE Account Guidance (Sort Of….) (Davis Brown Tax Law Blog). “The ABLE Act will amend Section 529 of the Internal Revenue Code to create a tax-free savings account for certain individuals who had significant disabilities before turning age 26.”

Jason Dinesen, Marriage in the Tax Code, Part 5: Examples of Taxes in 1920

 

Peter Reilly, Nay Nay We Won’t Pay – Evaders, Protesters and Resisters Versus IRS. “Deliberately not paying your taxes violates the law, so I don’t want to imply that there is an “official” correct way to do it.”

Bob Nadler, Who Won the Sanchez Case? (Procedurally Taxing). “In Sanchez, the taxpayer sought innocent spouse relief in the Tax Court and lost her case because the Court held no joint return was filed.  But the underlying assessment of a joint tax may have been erroneous.  If the assessment is found to be invalid the taxpayer will probably have no tax liability.”

 

Jack Townsend, Third Circuit Affirms Sentence Based on PSR Calculation of Tax Loss In Excess of Stipulated Tax Loss in Plea Agreement. Just because you admit evading one amount of tax doesn’t mean the judge can’t be convinced you evaded more.

No, it’s not. Next question. FATCA Repeal Efforts Just Failed, But Is It A Good Law? (Robert Wood):

FATCA’s massive and systemic overkill is great and vastly expensive. It is an elephant gun aimed at mosquitoes. And it has damaged the lives of over 7 million Americans abroad. Many can no longer open or maintain bank accounts where they live, get mortgages, or run their local businesses or households without difficulty. Many institutions around the world simple will not–perhaps cannot–open and maintain accounts for Americans, financial pariahs.

Its supporters say that international tax evasion justifies it, but like so many laws claiming good intentions, it has horrendous unintended (but easily foreseeable) consequences. Its complexity makes offenders out of ordinary citizens committing personal finance abroad, and its attempt to export U.S. tax enforcement invites other countries to do the same here.

 

Younkers Tea Room in its last week.

Younkers Tea Room in its last week.

Joseph Henchman, Nevada Governor Attacks Tax Foundation Report:

The proposal replaces Nevada’s current $200-flat business license fee with a tiered gross receipts tax.

Governor Sandoval quickly responded with a statement calling our report “utterly irresponsible, intellectually dishonest, and built on erroneous assumptions.” His ally Senator Michael Roberson added that our report “is nothing more than a disingenuous hatchet-job.”

The disappointing ad hominems from Governor Sandoval and Senator Roberson cloud the serious issues raised in our impartial analysis:

  • The BLF proposal has 67 revenue ranges for each of 27 industry categories, totaling 1,811 possible tax brackets.

  • BLF taxpayers will face absurdly high marginal tax rates, reaching over 13 million percent and likely distorting business decisions.

  • If the BLF tax burden were calculated in terms of a state corporate income tax, rates would range wildly from 0.2 percent to a punitive 77 percent.

  • Tax-motivated business restructuring would harm Nevada business competitiveness, and the punitive rate on the railroad industry likely violates federal law.

  • The tax rates for each industry were calculated using Texas data from a single year, which is not representative of Nevada’s economy.

  • The revenue estimates are probably overstated, which will lead to a revenue scramble when the tax underperforms.

Gross receipts and gross profits taxes have an inherent flaw: you can have large gross receipts or gross margins, but still have a net loss after expenses. Nevada doesn’t have an income tax. The politicians seem to want one in the worst way, and they are trying to get one that way.

 

Younkers elevator

 

TaxProf, The IRS Scandal, Day690The IRS Scandal, Day 689The IRS Scandal, Day 688

Len Burman, Do Senators Lee and Rubio Have a Secret Plan to Help Poor Families?

 

Russ Fox begins his annual listing of bad tax ideas with Bozo Tax Tip #10: Email Your Social Security Number. Please, don’t. And don’t sent tax documents with your identifying information as an email attachment. Identity fraud is easy enough without helping the fraudsters that way.

News from the Profession. Deloitte University Is a Cruise Ship Without Swimsuits (Caleb Newquist, Going Concern).

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Tax Roundup, 3/26/15: Not every project is an “activity,” and why that’s a good thing. And: starting Iowa’s tax law fresh.

Thursday, March 26th, 2015 by Joe Kristan

What’s an activity? The tax law’s “passive loss” rules limit business losses when a taxpayer fails to “materially participate” in an “activity.” Whether an “activity” is “passive” is mostly 20150326-2based on the amount of time spent in the activity by the taxpayer. That can raise a tricky question: just what is an “activity?”

Many businesses do multiple things. Take a CPA firm that does tax and auditing. If those feckless auditors lose money, is that a separate “activity” from the hard-working tax side? Or consider a convenience store owner with two locations; is each a separate activity, or are they one big activity?

The Tax Court addressed this problem yesterday in a case involving a South Florida developer. Greatly simplifying a complex story of real estate backstabbing and inter-family rivalry, the problem was whether an S corporation was the same “activity” as a partnership with the same owners set up for s specific development project. If so, family patriarch Mr. Lamas could cross the basic 500-hour threshold for participation in the combined activity, making his losses deductible.

Judge Buch explains the IRS regulation (1.469-4(c)) governing this issue:

This regulation sets forth five factors that are “given the greatest weight in determining whether activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469″:

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

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographical location; and

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

This regulation further instructs that taxpayers can “use any reasonable method of applying the relevant facts and circumstances” to group activities, and that not all of the five factors are “necessary for a taxpayer to treat more than more activity as a single activity”.

Equality in action in the Soviet Union on the Belomor Canal

The judge said that Shoma (the S corporation) and Greens (the partnership) met these requirements, considering they had the same control and both were in the same general business. Also:

Finally, Shoma and Greens were interdependent. Greens operated out of Shoma offices, used Shoma employees, and consolidated its financial reporting with Shoma’s. Greens was formed by Shoma as a condominium conversion project. The shareholders intended that Greens be dissolved after the project was completed and the capital returned to its shareholders.

Because Shoma and Greens meet these five factors, we find that they are an appropriate economic unit and should be grouped as a single activity.

The taxpayer was able to satisfy the court through witness testimony and phone records that he met the 500-hour requirement.

This case is good news for developers, as this structure is common in that business: a permanent S corporation sets up new LLCs for each development project. This case correctly concludes that they are all part of the same development business.

Cite: Lamas, T.C. Memo 2015-59.

 

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

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

Me, What an Iowa income tax might look like with a fresh start. My new post at IowaBiz.com, the Des Moines Business Record Business Professionals’ Blog, on what Iowa’s tax system might look like if we could start over. A taste:

A system designed from scratch would apply the ultimate simplification to Iowa’s corporation income tax: it wouldn’t have one. Iowa’s corporation income tax is rated the very worst, with extreme complexity and the highest rate of any state. 
 
Eliminating the corporation income tax would eliminate the justification for almost all of the various state incentive tax credits, all of which violate the principles of neutrality and simplicity in the first place. For its astronomical rates and complexity, it generates a paltry portion of the state’s revenue, typically 4-7 percent of state receipts.
 
For S corporations, a from-the-ground-up tax reform might tax Iowa resident shareholders only on the greater of distributions of S corporation income, or interest, dividends, and other investment income earned by the S corporations. The investment income provision would prevent the use of an S corporation as a tax-deferred investment. The effect would be to put S corporations on about the same footing as C corporations.

I have little hope in the legislature actually doing something sensible, but we have to start somewhere. I’d love to hear any thoughts readers may have.

 

 

Roger McEowen addresses the Tax Consequences When Debt is Discharged (ISU-CALT): “There are several relief provisions that a debtor may be able to use to avoid the general rule that discharge of indebtedness amounts are income, but a big one for farmers is the rule for ‘qualified farm indebtedness.'”

Russ Fox, A Break in my Hiatus: Poker Chips and Tax Evasion. Russ lifts his head from his tax returns to tell of the tax problems of a poker chip maker that he has personal experience with. “A helpful hint to anyone wanting to emulate Mr. Kendall: Just pay employees in the normal way, on the books, and send the withholding where it belongs.”

TaxGrrrl, Taxes From A To Z (2015): N Is For Nonrefundable Tax Credits

Robert Wood, Tax Fraud Draws 6 1/2 Year Prison Term Despite Alzheimer’s. Specifically, a dubious claim of Alzheimer’s.

Peter Reilly, Did Andie MacDowell’s Mountain Hideaway Require Tax Incentives? To listen to some people, you’d believe nothing good ever happened until tax credits were invented.

 

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Jason Dinesen, Financing a Small Business, Part 5 of 5: Know When to Keep Quiet With the Banker. “Here are a couple of real-world examples I’ve seen where business owners got hung up with the bank because the owner wouldn’t stop talking.”

This has lessons for IRS exams, too.

Kay Bell, Obamacare, bitcoin add twists to 2014 tax filing checklist

Annette Nellen, Another Affordable Care Act Oddity. “Perhaps the problem is more tied to the “cliff” in the PTC that causes someone to completely lose the subsidy once their income crosses the 400% of the FPL (more on that here).”

William Perez, How Much Can You Deduct by Contributing to a Traditional IRA?

 

Alan Cole, Richard Borean, Tom VanAntwerpWhich Places Benefit Most from State and Local Tax Deductions? (Tax Policy Blog):

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The short answer? Places with high state tax rates and high-income earners. Note the purple spot right in the middle of Iowa.

 

TaxProf, The IRS Scandal, Day 686

Renu Zaretsky, Sense and Sensibilities. Today’s TaxVox headline roundup covers the House GOP budget, a Texas tax cut, and tax-delinquent federal employees.

 

Richard Phillips, How Presidential Candidate Ted Cruz Would Radically Increase Taxes on Everyone But the Rich (Tax Justice Blog). A taste:

On the flat tax, Cruz has not yet spelled out a specific plan that he would like to see enacted, but it’s unlikely that any plan he proposed will be significantly better than the extremely regressive flat tax proposals that have been offered in the past.

Or, “we don’t know what he will do, but it will be terrible!”

 

Caleb Newquist, Big 4 Gunning for Big Law. To steal a cheap line: who wins if the Big 4 and Big Law fight to the death? Everybody!

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Tax Roundup, 3/24/15: Goldilocks and the medical practice. And: the spirit is willing, but the Tax Fairy is weak.

Tuesday, March 24th, 2015 by Joe Kristan

20120511-2Reasonable Compensation and the Goldilocks Rule. The IRS has been fighting taxpayers over how much compensation is “reasonable” since Great-grandpa realized he could reduce his corporate tax by taking it out as a salary. The agency historically fought this war over whether taxpayers were taking too much compensation. The IRS has since opened a second front, arguing that S corporation owner-employees were improperly reducing their employment taxes by taking too little salary out of the corporation. Employee owners now need to find a comp level that is “just right.”

As in any two-front war, a victory on one front might cause problems on the other. A Tax Court victory yesterday for the IRS over an eye doctor who took “too much” compensation may give ammunition to S corporation professional practices that take corporate earnings out via their K-1s and distributions — free of Medicare taxes — rather than as salary and bonus.

Judge Kerrigan says Dr. Ahmad, the owner and principal employee of Midwest Eye Center, took four $500,000 bonuses in November and Decemeber of 2007. This wiped out corporate income, which would likely have otherwise been taxed at a flat 35% rate under the “professional corporation” tax rules. They even overdid the bonus a little, carrying a net operating loss into 2008.

The taxpayer failed to convince the judge that the bonus was “reasonable”:

Petitioner produced no evidence of comparable salaries. Instead, petitioner argues that there are no “like enterprises” under “like circumstances” from which to draw comparisons. Petitioner argues that Dr. Ahmad’s large bonus was reasonable for several other reasons. Petitioner points to Dr. Ahmad’s increased workload during 2007 and the various roles that Dr. Ahmad performed, such as CEO, CFO, and COO, and the corresponding managerial duties of those positions. However, petitioner did not provide any methodology to show how Dr. Ahmad’s bonus was determined in relation to these responsibilities.

This tells us that when you have a C corporation owned by a single professional, you have to do more to determine how much bonus is “reasonable” than estimate what the pre-bonus taxable income is. If you are going to suck the income out of such a corporation through bonuses, it is wise to have written bonus criteria that make sense when compared to other practices.

It might be even better to make an S corporation election. The medical practice C corporation was hit with over $320,000 in tax on $1 million “excessive” compensation (and some other items), and another $62,000 in penalties — all of which would have been avoided in an S corporation, where all income is taxed on the 1040 regardless of whether it is “excessive.”

In fact, this case helps S corporation professional practices a little, in that it is evidence that it is not “reasonable” to assume that all income of the practice has to come out as compensation subject to employment taxes.

Cite: Midwest Eye Center, S.C., T.C. Memo 2015-53.

 

tax fairyIRS says “Rabbi” had a tax practice that wasn’t entirely orthodox. A Department of Justice Tax Press Release tells a story of a man who sought the Tax Fairy in the Torah:

The lawsuit, filed in the U.S. District Court for the Southern District of California, alleges that Lawrence Preston Siegel, aka Larry Lave, Yehuda Lave and Larry Easy, falsely represented that he is a licensed attorney and CPA in order to solicit business for his tax practice. 

According to the civil injunction suit, Siegel pleaded guilty to one count of tax evasion and two counts of subscribing false tax returns in 1994.  He subsequently resigned from the California bar in 1994, lost his CPA license in 1997, and never regained either accreditation, according to the suit.  The complaint alleges that following his release from federal prison in 2001 for additional convictions, Siegel established a tax practice and stated online that he is an “[i]interesting combination of a Tax Lawyer and CPA who is also a Rabbi trained in Spirituality.”  Siegel, the complaint alleges, claimed to others that his “goal as a spiritual Rabbi, Tax Attorney and CPA is to save people money without going to jail … Everybody wants to pay very little tax, I do it legally and morally under the Torah.” 

It never occurred to me that a Rabbi would require the qualifier “trained in Spirituality.” Isn’t that the whole idea? In any case, he isn’t well-trained in tax, if the Justice Department press release is to be believed (my emphasis):

According to the complaint, among his tax fraud schemes, Siegel falsely advised his customers, typically high earners who own profitable businesses, that they can establish companies in Nevada and treat their California home as an out-of-state corporate office.  Siegel falsely claimed that doing so would transform a vast array of non-deductible personal expenses into tax deductible business expenses, according to the suit.  According to the complaint, Siegel boasted about this tax fraud scheme in e-mails, including one where he falsely claimed that his customers are entitled to free housing as tax-free compensation from their out-of-state companies and that “[t]he housing can [b]e luxurious and cost thousands a [] month” because “[t]here is an assumption that corporations don’t waste money.”

What’s amazing to me is that (if the allegations are true) he had clients who actually believed this. Religious or secular, reform or orthodox, believer or non-believer, the desire to believe in the Tax Fairy is strong among all races, religions and belief systems. But there is no tax fairy.

 

terrace hill 20150321

 

Kristine TidgrenExpanded Relief for Taxpayers Receiving Erroneous 1095-As:

On Friday, March 20, CMS announced that it had discovered additional 1095-A errors among those forms issued by both State-run exchanges and the federally-facilitated exchange. CMS is notifying taxpayers impacted by these errors with emails, phone calls, and messages in their Marketplace accounts. Because of these errors, Treasury is expanding the relief it offered in February.

Now, anyone who (1) enrolled in any type of marketplace coverage, (2) received an incorrect Form 1095-A, and (3) filed their return based upon that form, does not need to file an amended tax return. The IRS will not pursue the collection of any additional taxes based on updated information contained in the corrected forms. This relief applies to tax filers who enrolled through either the federally-facilitated marketplace or a state-based marketplace. As provided before, taxpayers who were harmed by the errors may file amended returns to collect the difference.

So the liability of a taxpayer for potentially thousands of dollars in taxes depends on two items:

1. Whether the exchange botched the 1095-A filing, and

2. Whether the taxpayer filed before the 1095-A was corrected.

These are whimsical criteria on which to stake thousands of dollars of tax credits.

 

Chicago Tribune, It’s Obamacare’s first tax season. Can the IRS handle it?Kristy Maitre of the ISU Center for Agricultural Law and Taxation is quoted: “Overall, I do not believe they’re as prepared as they could have been.”

Hank Stern, The Best Laid Plans [Updated]. “In other words, a lot of folks with even rudimentary math skills have figured out that paying the fine penalty tax and “going bare” is a much more cost-effective choice than buying coverage.”

Robert Wood, Happy Anniversary Obamacare Taxes, Many Happy Returns.

 

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Norton Francis, Bobby Jindal’s Revenue Enhancements (TaxVox). “His trick: Turn refundable business credits into non-refundable credits.”

Kay Bell, Downton Abbey’s new tax connection via Rep. Aaron Schock

Tyler Cowen presents New arguments on a carbon tax, including one that suggests a way in which “…a carbon tax could make global warming worse.”

Martin Sullivan, U.S. Effective CorporateTax Rate Higher Than Foreign Competitors? Not Really (Tax Analysts Blog)

 

TaxProf, The IRS Scandal, Day 684

 

News from the Profession. Conducting Tax Return Update Meetings at the Gym Maybe Not the Best Idea (Caleb Newquist, Going Concern). “If a client requests a meeting at a location where heavy objects are laying around, and there’s an off-chance that the news you have may be anything other than positive, may we suggest an alternative venue.”

 

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

Monday, March 23rd, 2015 by Joe Kristan

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

 

obamasignsaca

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

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

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

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

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

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

 

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

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

 

 

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

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

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

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

Peter Reilly, Ninth Circuit Rules Against War Tax Resister

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

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

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

 

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

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

 

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

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

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

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

 

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

I’ll take the underdog.

 

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