Posts Tagged ‘Robert Wood’

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!

 

20140505-1

 

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

 

20140506-1

 

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.

 

Share

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.

 

20150413-1

 

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.

 

Share

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.

 

IMG_1395

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.

 

Share

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)

 

20150409-1

 

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.

 

Share

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)

 

20150408-1

 

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.

 

20140805-2

 

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).

 

Share

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!

20150407-2

 

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.

20150407-3

 

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.

 

Share

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.'”

 

20120503-1

 

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).

 

IMG_1429a

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.'”

Share

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.

 

20150403-2

 

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)

 

Share

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. 

20150401-1

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.”

 

20150401-2

 

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)

Share

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.

20150331-1

 

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!

Share

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:

20150329FB-1

 

And here is the site yesterday:

20150329FB-2

 

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).

Share

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.

 

20150326-3

 

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):

20150326-1

 

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!

Share

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.

 

IMG_0897

 

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.”

 

Share

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.

 

IMG_1429a

 

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.

 

Share

Tax Roundup, 3/18/15: In Spite of all the Danger, state shuts down revenue cameras. And more!

Wednesday, March 18th, 2015 by Joe Kristan
Flickr image by Robert Couse-Baker under Creative Commons license

Flickr image by Robert Couse-Baker used under Creative Commons license

Des Moines to lose freeway revenue cameras. The Iowa Department of Revenue moved to reduce the tax on strangers driving through Des Moines yesterday by ordering the city to shut down its speed cameras in I-235. From The Des Moines Register:

Ten of 34 automated traffic enforcement cameras on or adjacent to Iowa highways must be shut down by April 17 because they are not making roads safer, the state’s Department of Transportation ruled Tuesday.

Among the 10 that would be powered down are speed enforcement cameras on eastbound Interstate Highway 235 near Waveland Golf Course in Des Moines.

Department of Transportation traffic and safety director Steve Gent explained:

Gent said that that section of I-235 is safe, with a crash rate that is significantly lower than the state average for urban interstates. In addition, the crash rate there has not changed significantly since the cameras’ installation, he said.

People who live here know where the cameras are. It’s people who are new to town, who have been driving 75 all the way from Omaha, and who hit town when traffic is light, who are likely to get the tickets. Of course, the municipal highwaymen are not pleased:

“We give out 43,000 tickets a year there to people who that are going 11 miles an hour or more over the speed limit,” Des Moines Mayor Frank Cownie said. “It’s amazing to me that the DOT doesn’t think that that is a safety issue.”

Hmmm. The cameras aren’t reducing speeding; the number of tickets issued is holding steady. They aren’t reducing the accident rate. But safety is at risk! The the safety of the municipal revenue stream. “Last year, 43,032 citations were issued, which generated about $1.2 million for the city, officials said.”

Related:

The city needs to pick your pockets for four more years to be sure you are safe.

Des Moines revenue cameras: $32,305 per accident ‘prevented’

 

eic 2014The TaxProf reports GAO: Improper Government Payments Increased 18% in 2014, to $125 Billion; EITC’s 27% Error Rate Is Highest of Any Program. That’s $17.7 billion either misdirected or stolen annually under “our most effective anti-poverty program.” It certainly helps reduce the poverty of the scammers and grifters that rob the program, and the shady preparers who make it easier.

 

 

 

TaxGrrrl, Understanding Your Forms: Form 1098, Mortgage Interest Statement

And probably not YOUR situation. Clothing tax deductions are OK, but just in certain situations (Kay Bell)

Peter Reilly, Dude Ranch Shareholders Stuck With Corporate Tax – It’s All About Execution. A “Midcoast” transaction falls afoul of “transferee liability.”

Robert Wood, There’s Still Time To Turn Your Hobby Into A Tax Write-off. “Will the IRS pay for your hobby? The short answer is no, at least if you ask the question this way. But sometimes, the IRS will foot the bill provided you make your pastime enough of a real business to qualify.”

Jason Dinesen, Marriage in the Tax Code, Part 4: Joint Returns Still the Norm in 1917

Tony Nitti, Take The Tax Bracket Challenge: Which Is The Best Code Section Of Them All?. My favorite is Sec. 6313, without which the whole edifice must fall. It reads in full:

In the payment of any tax imposed by this title, a fractional part of a cent shall be disregarded unless it amounts to one-half cent or more, in which case it shall be increased to 1 cent.

 

If only the whole tax law were that clear and easy to understand.

 

20150123-2

 

TaxProf, The IRS Scandal, Day 678. The IRS role in criminalizing political opposition is discussed.

Clint Stretch, How to Make Tax Return Filing Easier (Tax Analysts Blog)

Scott Hodge, A Response to Josh Barro on Dynamic Scoring (Tax Policy Blog).

Howard Gleckman, The House GOP Budget As Can Opener: An Impossible Task and A New Lesson in Dynamic Budget Scoring (TaxVox)

Caleb Newquist, Triple Entry Accounting: Harebrained or Genius? (Going Concern). “I’ve never been to SXSW, but I imagine that all the smart people talking about smart ideas and getting all smart with each other is nauseating.”

 

Hiryu, the fourth and last Japanese aircraft carrier destroyed at the Battle of Midway 70 years ago today.

Hiryu, the fourth and last Japanese aircraft carrier destroyed at the Battle of Midway

Yes, because it worked so well the last time.  Japan should follow wartime slogan to deal with tax evasion, LDP lawmaker says:

Junko Mihara, a House of Councilors member from the ruling party, referred to the slogan hakko ichiu at a meeting of the Upper House Budget Committee on Monday, saying it represented “values Japan has cherished since its founding.”

The term roughly translates as “all the world under one roof.”

During the Sino-Japanese war and World War II, the Japanese government used the slogan to justify its Emperor-centered policies and overseas expansion.

If that doesn’t work, they can always rebrand it as The Greater East Asia Co-Prosperity Sphere. I’m sure neighboring countries would be on board.

 

Share

Tax Roundup, 3/17/15: St. Patrick didn’t chase the taxes out of Ireland.

Tuesday, March 17th, 2015 by Joe Kristan

20150317-1aTax luck of the Irish. While America celebrates Irish heritage by today by drinking far too much bad dyed beer, we’ll ponder the sober look taken by Kyle Pomerleau at the Irish tax system (my emphasis):

It may be surprising to Americans to hear that Ireland has pretty high taxes. We usually hear about Ireland’s tax system in the context of its corporate income tax rate, which sits a low 12.5 percent, half the average rate of the OECD. We are led to believe that Ireland is a low-tax country in general.

In reality, Ireland’s tax code has some of the highest marginal tax rates, especially on income, in the OECD.

Ireland’s top marginal individual income tax rate is 40 percent on individuals with incomes over 33,800 EUR ($36,236).  On top of that, individuals need to pay payroll taxes of 4 percent on wages and other compensation. Ireland also has “Universal Social Charge,” which tops out at 8 percent (11 percent for self-employed individuals).

Altogether, the top marginal tax rate in Ireland is 52 percent. The average top marginal income tax rate (plus employee-side payroll taxes) is 46 percent in the OECD. Not only is this rate high, it applies at a relatively low level of income ($40,174).

It’s enough to make me glad great-great-great Grandpa took off for North America in the 1840s.*

The tax rate is also high on investment income. Capital gains are taxed at 33 percent, which is significantly higher than the OECD average of about 18.4 percent. Dividends are taxed at ordinary income tax rates of 40 percent plus the 8 percent Universal Social Charge (48 percent).

The US top marginal rate, excluding state taxes, is about 44.588%, considering phase-outs and the Obamacare 3.8% Net Investment Income Tax, but it doesn’t kick in until taxable income reaches $406,750 for single filers and $457,600 on joint returns. Our fully-loaded top capital gain and dividend rate is 19.25%. So if you must drink something, drink to having a less awful top marginal rate than Ireland.

*OK, technically he came from County Tyrone, which is in the U.K., not the Republic of Ireland.

 

daydrinkersMaria Koklanaris reports on a study by the left-side policy shop Good Jobs First (Tax Analysts $link):

There are 11 companies listed in both the top 50 state and local subsidy recipients and the top 50 federal subsidy recipients. They are Boeing, The Dow Chemical Co., Ford Motor Co., General Electric, General Motors, JPMorgan Chase & Co., Lockheed Martin Corp., NRG Energy Inc., Sempra Energy, SolarCity, and United Technologies.

Also, six companies on the top 50 state list are on the list of the top 50 recipients of federal loans, loan guarantees, and bailout assistance — Boeing, Ford Motor, General Electric, General Motors, Goldman Sachs, and JPMorgan Chase. Five companies – Boeing, Ford Motor, General Electric, General Motors, and JPMorgan Chase — are on all three lists.

All companies you just feel good about when you pay extra taxes, so they can pay less. Especially GE and JPMorgan Chase.

 

Christopher Bergin, The IRS Doubles Down on Secrecy (Tax Analysts Blog):

Faced with blistering criticism over how it handled exemption applications, accusations that it wrongly – and, perhaps, even criminally – withheld e-mails from lawmakers and the public, and rising concerns that it is the most secretive government agency we have, what is the Internal Revenue Service’s response?

To become even less transparent. As the saying goes: You can’t make this stuff up.

I think the evidence can lead to only two conclusions about the current IRS commissioner: either he is the most tone-deaf and socially-unskilled administrator in the Federal government, or he wants to make the IRS as unaccountable as possible.

 

TaxProf, The IRS Scandal, Day 677. IRS, fighting transparency tooth and nail.

 

The income tax, the Ultimate Swiss Army Knife of public policy.  Flickr Image courtesy redjar under Creative Commons license.

The income tax, the Ultimate Swiss Army Knife of public policy. Flickr Image courtesy redjar under Creative Commons license.

Peter Reilly, Don’t Sic IRS On Racist Frat Boys. “Nobody ever suggests that the Equal Employment Opportunity Commission or the Department of Education should pitch in and help collect taxes, but for some reason the IRS is seen as the Swiss army knife of social policy, ready to further shred its tattered reputation addressing issues that stump other institutions.”

 

 

William Perez, Need to File a Year 2011 Tax Return? Deadlines and Resources

Kay Bell, Filing tips for the 2015 tax deadline that’s just a month away

TaxGrrrl, Taxes From A To Z (2015): I Is For Insolvency. And Illinois, but that’s the same thing.

Robert Wood, Of Obamacare’s Many Taxes, What Hurts Most. So many choices.

Stephen Olsen, Summary Opinions for week ending 02/27/15 (Procedurally Taxing). A roundup of developments in the tax procedure world.

Russ Fox begins his last part of tax season hibernation. Take care of yourself and your clients, Russ. I’ve been tempted to hibernate myself, but since now is when people are most interested in this stuff, I keep at it.

 

Picture by Dan Kristan

Picture of Irish countryside by Dan Kristan

 

Richard Auxier, Can Rube Goldberg Save the Highway Trust Fund? (TaxVox). “In principle, the Highway Trust Fund (HTF) is simple. Drivers pay a federal gas tax when they purchase fuel, the revenue goes to the HTF, and the federal government sends the dollars to states and local governments for highway and transit programs. But in practice the system is a mess and a new proposal by a road builder trade group shows just how tangled this web has become.”

News from the Profession. Accountants Share Their Dreams. (Caleb Newquist, Going Concern)

 

Share

Tax Roundup, 3/16/15: Corporation returns are due today! And: IRS plays a cruel joke on 2011 non-filers.

Monday, March 16th, 2015 by Joe Kristan

20130415-1It’s March 16. That means calendar-year corporation and S corporation returns are due today. Failure to file on time can be expensive. If you are filing or extending today, protect yourself by e-filing. If you must paper file, use Certified Mail, Return Receipt Requested, to document timely filing. If you can’t get to the post office before it closes, you can go to the FedEx or UPS stores, but make sure you use the right Authorized Private Delivery Service and send it to the proper service center street address, as private services can’t deliver to the service center post office box addresses.

 

Flickr image courtesy Sean MacEntee under Creative Commons license

Flickr image courtesy Sean MacEntee under Creative Commons license

Hah! Fooled you! The IRS last week issued a press release: IRS Has Refunds Totaling $1 Billion for People Who Have Not Filed a 2011 Federal Income Tax Return.

If you haven’t filed your 2011 return yet and you want to claim your refund, you’re in for a nasty surprise: you’re probably already too late.

Section 6511 of the Internal Revenue Code (NOT the “IRS Code.” Stop that!) says (my emphasis):

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. 

That means for most nonfilers, it’s too late to get that 2011 refund, and it’s 2012 refunds that expire on April 15.

Don’t believe me? Then believe Robert Wood

If you pay estimated taxes or have tax withholding on your paycheck but fail to file a return, you generally have only two years (not three) to try to get it back.  Suppose you make tax payments (by withholding or estimated tax payments) but haven’t filed tax returns (shame on you!) for three or four years? When you file those long-past-due returns, overpayments in one year may not offset underpayments in another.

This is why it is an awful idea to fall behind on filing. If you have a refund coming, it dies in two years, but if you owe and don’t file, the statute of limitations never starts, and the IRS can come after you anytime. If you have refunds coming for some years, but owe on others, you don’t get to offset the expired refunds against the amounts you owe. Heads they win, tails you lose.

I wonder if they do high-fives at the IRS Service Centers when people file their 2011 returns looking to cash in on that $1 billion.

Related: Kay Bell, April 15, 2015, is deadline for unclaimed 2011 tax refunds

 

You mean that wasn’t a guitar mass at 2 a.m.? Tax Exempt Church Turns Out To Be A Night Club (Robert Wood).

 

W2TaxGrrrl, Understanding Your Forms: W-2, Wage & Tax Statement

Kristine Tidgren, Proving That Loan Was a Gift Requires Evidence (ISU-CALT). If it’s documented as a loan and the “lender” dies, it will be hard to convince the heirs that you weren’t supposed to pay it back.

Annette Nellen, Busy Season Updates – TPR and ACA. Some practical thoughts on this tax season’s biggest new challenges.

Jason Dinesen, Financing a Small Business, Part 4 of 5: Don’t Spend Money Just to Get Tax Deductions. A disappointing amount of this happens right at year-end.

Jim Maule, Who’s to Blame for Tax Fraud?  “As to the first point, that tax software is not the reason for tax fraud, I agree.”

Russ Fox, Foreign Earned Income Exclusion Gets a Vegas Preparer in Hot Water

Jack Townsend, Sentencing of Ex-Casino Owner, Nevada Businessman and Former NFL Player for Fraudulent Tax Scheme

 

I went to a hockey game yesterday, and a wedding broke out:

20150316-1

There was a pretty good fight, too. Not involving the couple, I’ll hasten to add.

 

William McBride, Critics of Rubio-Lee Tax Reform Are Way Off the Mark (Tax Policy Blog):

In sum, there are many reasons to think the Rubio-Lee tax plan, or something similar, would have tremendous growth effects. The Tax Foundation’s macroeconomic tax model finds that the plan is indeed extremely pro-growth, while raising the after-tax incomes of families up and down the scale.

While critics may challenge the magnitude of these findings, given the current state of the economy and middle-class wages, this is a serious plan that should spur an honest debate over how best to overhaul our dysfunctional federal tax code.

He addresses doubters like William Gale.

 

Jennifer DePaul, Michigan House Kills Film Tax Credit, Florida Lawmakers Look to Revamp Theirs (Tax Analysts, $link):

Bill sponsor Rep. Dan Lauwers (R) said the film industry has “sapped the state’s budget without creating promised full-time jobs.”

“For every dollar of taxpayer money we have invested into film subsidies, the state has gotten 10 cents in return from that venture,” Lauwers said in a statement. “There are so many more worthwhile uses we can put that money toward.”

It’s good to see a state legislator grasp the concept of opportunity costs. Florida lawmakers apparently didn’t get the memo.

Jared Walczak, Film Tax Credits on the Chopping Block in Massachusetts (Tax Policy Blog)

 

20150316-2

 

IJReview, New Tax Scam: That ‘IRS Agent’ Calling and Threatening You For Your Money Is a Fake.

 

TaxProf, The IRS Scandal, Day 676The IRS Scandal, Day 675The IRS Scandal, Day 674. This one, quoting Roger Wood, tells you why the IRS will never be trustworthy under its current commissioner:

After the targeting scandal had been underway for over a year, Mr. Koskinen testified that recovery efforts had been thorough, but the tapes and emails just couldn’t be found. As if to goad Republicans, he said that millions in taxpayer money was spent looking. Over 250 IRS employees spent 100,000 hours, costing taxpayers at least $14 million. However, the Treasury Inspector General has revealed that the IT people at the IRS say no one even asked them to recover the emails.

A new commissioner isn’t sufficient to make the IRS trustworthy, but it is necessary.

 

Caleb Newquist, PwC Gave Former Ways & Means Chairman Dave Camp a Job. (Going Concern) It may be tax season, but I suspect he’s not going to be looking at any 1040s.

Peter Reilly, Looks Like No Charitable Deduction For Gifts To Steak And You Know Day. No, not baked potatoes.

 

Share

Tax Roundup, 3/13/15: Making the ultimate sacrifice to tax administration. And: Tax Sadist Tourism!

Friday, March 13th, 2015 by Joe Kristan
http://commons.wikimedia.org/wiki/File:SPA51928.JPG#/media/File:SPA51928.JPG

“SPA51928″ by Jan Leineberg – Own work. Licensed under Public Domain via Wikimedia Commons -

Maybe I should leave my office door open. A tax office official in Finland who died at his desk was not found by his colleagues for two days (BBC, via the TaxProf):

The man in his 60s died last Tuesday while checking tax returns, but no-one realised he was dead until Thursday.

The head of personnel at the office in the Finnish capital, Helsinki, said the man’s closest colleagues had been out at meetings when he died.

He said everyone at the tax office was feeling dreadful – and procedures would have to be reviewed.

Procedures? Like what? I can see the memo now:

To: All Employees

From: Pekka Raanta, HR director

Re: New Procedures

The recent unfortunate incident involving our dear colleague highlights a need for new procedures for preventing a recurrence of the incident. The presence of unauthorized dead in the office poses both safety and administrative issues.

To ensure early deduction of deaths among our colleagues, we will initiate the following MANDATORY daily procedures.

1. The office manager is to begin each day by kicking all employees. The receptionist will kick the office manager. Should they not respond, please complete form HR-6-MORT.

2. At 10 am and 2 pm each day, we will have a roll call. THIS IS IMPORTANT. Please do not answer the roll for an absent colleague, as this could inadvertenly conceal a death.

3. Buddy system. You will be assigned a “death buddy” by the H.R. Department. You and your death buddy will be responsible for continuous respiration monitoring. Should you go on break or to the restroom, IT IS YOUR RESPONSIBILITY TO SECURE A SUBSTITUTE. You are also responsible for making mutually satisfactory arrangements to vacation together.

4. ALL EMPLOYEES are required to attend training to enable you to identify dead colleagues. Warning signs such as unusually low productivity and wearing the same outfit for consecutive days will be covered. We realize that it can be difficult to distiguish between the productivity of the dead and the normally-functioning, but there are important signs to look for.

Pihla will complete our colleague’s final time report. Please charge the final two days to “diversity training.” 

I wonder if there is a Purple Heart for tax officials who die at their desks. TaxGrrrl has more on this important story.

 

Foggy Friday at Principal Park. Opening day looms in the fog, April 17!

Foggy Friday at Principal Park. Opening day looms in the fog, April 17!

Russ Fox reminds us that Corporate Tax Deadline is Monday, March 16th and Form 1042 Filing Deadline is Monday, March 16th. Form 1042 reports most foreign withholding, except for partner withholding.

 

Jack Townsend, Judge Posner Confronts a Crackpot in a Tax Crimes Case. “The point is, Judge Posner entertains.”

Jim Maule, Moving? Let the IRS Know. “The lesson is undeniable. Taxpayers who move need to send a change of address notice to the IRS.”

Peter Lowy covers the same case as Prof. Maule in Gyorgy v Comm’r Tees Up Important Procedural issues at Procedurally Taxing.

 

Via Wikipedia

Via Wikipedia

Robert Wood, Fake IRS Agent Scam Targets Public, Even Feds, While Identity Theft Tax Fraud Is Rampant. “Senate testimony shows just how serious fraudsters are at tax time, and just how easy it is for them to get your tax refund.”

Tom Giovanetti,, Blame the IRS and Congress, not software, for tax fraud (The Hill)

Responsibility falls squarely at the feet of the IRS to enforce existing law but ultimately to Congress, as it’s within Congress’s power to reform and simplify programs and restructure administrator incentives to identify and prosecute fraud.

That’s why it’s shameful to see Congress pass the buck and attempt to pin the blame for tax fraud on . . . tax preparation software. That’s right—according to some in Congress, apparently TurboTax is to blame.

Blaming TurboTax for the way the IRS sends billions to thieves every year is like blaming GM for a bank robbery when a Chevy was used as the getaway car.

 

Peter Reilly, Jury Finds Kent Hovind Guilty Of Contempt Of Court No Verdict On Fraud Charges. More on the sago of the founder of the young earth creationist theme park.

 

20130316-1Kyle Pomerleau, Irish Business Leader Calls for Income Tax Reform:

It may be surprising to Americans to hear that Ireland has pretty high taxes. We usually hear about Ireland’s tax system in the context of its corporate income tax rate, which sits a low 12.5 percent, half the average rate of the OECD. We are led to believe that Ireland is a low-tax country in general.

In reality, Ireland’s tax code has some of the highest marginal tax rates, especially on income, in the OECD.

I did not know that.

 

Robert Goulder, Reading Between the Lines (Tax Analysts Blog). “Reading between the lines, we can surmise that conservatives in Congress are now trying to decide which is worse: Camp’s revenue raisers or a federal consumption tax.”

Kay Bell, Old online sales tax bill resurrected in new Senate

TaxProf, The IRS Scandal, Day 673. My high school classmate got pushed around by Lois Lerner in her FEC days, and Politico can’t be bothered to care.

Carl Davis, Nine States and Counting Have Raised the Gas Tax Since 2013 (Tax Justice Blog)

G. William Hoagland, Dynamic Scoring Forum: Overblown Concerns? (TaxVox)

 

IMG_1397

 

Tony Nitti, House Bill Would Provide Tax Deduction For Gym Membership; Shake Weight. I wonder how long it would take to start qualifying gyms specializing in 12-ounce curls to tap into this?

Alberto Mingardi, Greece and tax sadist tourism (EconLog):

The Greek government apparently announced that it wants to hire part timers as “undercover agents to grab out tax evaders”. Tourists, students and housewives could work armed with wireless devices to catch shopkeepers and service providers who do not issue receipts when they sell goods and services.

The application of the concept to tourists potentially opens up a new whole kind of business: sadistic tourism. Syriza regularly portrays Germans as evil people that want to make the poor Greek suffer: why not turning that into a profitable line of activity for the government? Come to Greece. Ouzo, great sea, beautiful landscapes, moussaka, and you’ll have the pleasure to force dirty little shopkeepers to pay their dues to the government!

If the Treasury Employees Union has a travel office, this could be a popular offering.

 

Share

Tax Roundup, 3/12/2015: Tails and legs: Tax Court says that by any name, refundable tax credits are income.

Thursday, March 12th, 2015 by Joe Kristan

20120801-2Yesterday the Tax Court ruled that refundable business incentive tax credits issued by New York generate taxable income. Judge Holmes made the decision entertaining. Well, except maybe for the taxpayer who lost.

Credits works differently from deductions. A $100 tax credit reduces your tax by $100, while a $100 deduction reduces the tax of a taxpayer in the 25% bracket by only $25. When a credit is “refundable,” if it exceeds the tax you would otherwise owe, the government sends you a check for the excess. The federal Earned Income Tax Credit is the most common example. Iowa has several such credits, including its EITC and its research credit for business.

New York also uses refundable credits. Judge Holmes sets the stage (all emphasis is mine):

New York State uses extremely targeted tax credits as an incentive for extremely targeted economic development in extremely targeted locations. Those who receive these credits may be extremely benefited — even if they do not owe any state income tax, New York calls the credits overpayments of income tax and makes them refundable. David and Tami Maines say that none of the credits should be taxable because New York labels them “overpayments” of past state income tax, and they never claimed prior deductions for state income tax. The Commissioner disagrees and argues that these refundable credits are, in substance even if not in name, cash subsidies to private enterprise — and just another form of taxable income.

The taxpayer said that because New York called the refundable amount of the credits “overpayments,” they were like withholding:

So the key question in this case becomes whether a federal court applying federal law has to go along with New York’s definition.

The Maineses understand the importance of this question, and they argue that if New York State tax law calls these payments “overpayments” we have no power to call them something different. They point to cases like Aquilino v. United States, 363 U.S. 509, 513 (1960) (quoting United States v. Bess, 357 U.S. 51, 55 (1958)), where the Supreme Court held that Federal tax law “‘creates no property rights but merely attaches consequences, federally defined, to rights created under state law.”‘

Judge Holmes is unconvinced (my emphasis):

The Commissioner does not challenge these cases. And he also agrees that New York law labels the credits as “income tax credits,” and excesses or surpluses as “overpayments” of state income tax for state-tax purposes. But is a state’s legal label for a state-created right binding on the federal government? Here begins the disagreement. The Maineses contend that New York’s tax-law label of these excess EZ Credits as overpayments is a legal interest that binds the Commissioner and us when we analyze their taxability Lincolnunder federal law. The Commissioner warns that if this were true, a state could undermine federal tax law simply by including certain descriptive language in its statute. To use Lincoln’s famous example, if New York called a tail a leg, we’d have to conclude that a dog has five legs in New York as a matter of federal law. See George W. Julian, “Lincoln and the Proclamation of Emancipation,” in Reminiscences of Abraham Lincoln by Distinguished Men of His Time (Allen Thorndike Rice, ed., Harper & Bros. Publishers 1909), 227, 242 (1885), available at https://archive.org/details/cu31924012928937.

We have to side with the Commissioner (and Lincoln) on this one: “Calling the tail a leg would not make it a leg.” Id. Our precedents establish that a particular label given to a legal relationship or transaction under state law is not necessarily controlling for federal tax purposes.

The taxpayer advanced a more novel argument:

The Maineses also contend that their credits are excludable from their taxable income as welfare. The Commissioner has long held that certain payments from social-benefit programs that promote the general welfare are not includible in gross income.

I’ve called such credits “Corporate welfare” at least once or twice myself. But calling a tail a leg, or corporate welfare, doesn’t make it welfare for tax exclusion purposes:

Critics of programs like New York’s might call them “corporate welfare.” But that’s just a metaphor — the credits that New York gave to the Maineses were not conditioned on their showing need, which means they do not qualify for exclusion from taxable income under the general-welfare exception. See also, e.g., Rev. Rul. 2005-46 (holding that state grants for expenses incurred by businesses that agree to operate in disaster areas are not excludable under the general-welfare exclusion).

We therefore hold that portions of the excess EZ Investment and Wage Credits that do not just reduce state-tax liability but are actually refundable are taxable income.

New York FlagOne interesting thing about the New York credits at issue is that they can either be refunded, at the cost of a loss of some of the credits, or carried forward in full at the taxpayers option. In a footnote, Judge Holmes says that while the taxpayer has the option of whether to claim the refund, there is no option on when it affects taxable income:

Recall that whether or not the Maineses choose to receive the refundable portion of the credit, they are in constructive receipt of it and therefore must include it in their gross income.

This is a full-dress “reported” Tax Court decision, which means it is meant to guide future litigation in this area. A footnote in the decision says there are 10 other related New York cases pending. It has obvious implications for the Iowa research credit and historical building credits, which are refundable. There are many other such refundable tax credits in other states.  I never doubted that such credits were taxable “accessions to wealth,” and the Tax Court feels the same way.

Cite: Maines, 144 T.C. No. 8.

 

The Des Moines Register reports Lawmaker proposes end to Iowa taxes on pensions:

Sen. Roby Smith, a Republican, has introduced Senate File 277, which would phase out taxes on retirement income over five years, starting in fiscal year 2017. The measure is co-sponsored by 23 Republican senators. He said that during his re-election campaign last fall, one of the common complaints he heard from older Iowa voters was the need to pay taxes on retirement income.

Let me register my complaint about having to pay taxes on income while I’m working. Can I get an exemption?

IMG_1284This sort of carve-out is a classic example of how the tax law goes bad. High rates make people motivated to carve out breaks for themselves. It works especially well if those seeking the breaks are organized and have time to spare to press their case, like retired folks.

But giving tax breaks just by virtue of age or working status is the wrong way to go. If a retired person is poor, reduce his taxes to take his poverty into account (the tax law already does so in a number of ways). But if he is wealthy and retired, why should he get a better deal than a less-wealthy person who still trudges to work every day? In terms of wealth, the elderly are better off than the not-so-elderly, as a group.

It would be much better for the legislature to cut the rates for everyone, get rid of special carve outs for the politically influential, and help the poor, of whatever age, with a reasonable exemption for low-income taxpayers.

 

Jason Dinesen asks Why Do Unethical Clients Bother Working With Tax and Accounting Pros?:

I asked one of my peers about this and he said it’s because that type of person likes to feel important. They “have an accountant” and they can brag about it to their friends.

It’s an excellent question. My answer is that they feel they are buying excuses. If they get caught, they will immediately blame the accountant.

Robert Wood, Former NFL Player & 2 Others Get Jail & $35M Restitution For Tax Break Scheme:

The evidence at trial established that through NADN, the defendants promoted and sold a product called Tax Break 2000. Tax Break 2000 purported to be an online shopping website. The defendants falsely and fraudulently told customers that buying the product would allow them to claim legitimate income tax credits and deductions under the Americans with Disabilities Act (ADA) by modifying the website each customer was provided to make it accessible to the disabled.

If the stupidity of the tax scheme were a factor in sentencing, they’d have faced a firing squad.

 

TaxGrrrl, Taxes From A To Z (2015): Early Distributions

Cara Griffith, Will There Be an Increase in State Transfer Pricing Audits? (Tax Analysts Blog). “States have not, however, been particularly successful in challenging the arm’s-length pricing of intercompany transactions”

 

20150312-1

Kay Bell, Senate tax writers want public suggestions for tax reform

Stephen Entin, Tax Indexing Turns 30 (Tax Policy Blog)

William Gale, Rubio-Lee Hints at Tax Reform’s Troubling Direction (TaxVox).

 

TaxProf, The IRS Scandal, Day 672. The state continues its efforts to criminalize opposition.

Tax Analysts ($link), IRS Stops Providing Exemption Letters to Press. Given the stellar performance of the IRS Exempt Organizations division, what’s not to trust?

 

Adrienne Gonzalez wonders What Are the Accounting Profession’s Darkest Secrets? (Going Concern). Other than the ritual human sacrifice?

 

Share

Tax Roundup, 3/10/15: Deductions by the bag. And: tax credits put the “green” in green energy!

Tuesday, March 10th, 2015 by Joe Kristan
Flickr image courtesy Jen Waller under Creative Commons license.

Flickr image courtesy Jen Waller under Creative Commons license.

Bags and bags of deductions. To many taxpayers, the deduction for donations of household goods is sort of an extra standard deduction. If the value of non-cash charitable deductions claimed on 1040s were really as high as the deductions claimed, Salvation Army and Goodwill could be in the Fortune 500.

But the tax law doesn’t really have a freebie deduction for contributions of household goods. The IRS explains (item 7):

To claim a deduction for gifts of cash or property worth $250 or more, you must have a written statement from the qualified organization. The statement must show the amount of the cash or a description of any property given. It must also state whether the organization provided any goods or services in exchange for the gift.

A Maryland woman failed to meet this test in Tax Court yesterday. Special Trial Judge Carluzzo takes up the story:

Petitioner claimed a $31,037 charitable contribution deduction on her 2008 return, consisting of $15,340 in cash contributions and $15,697 in noncash contributions. Petitioner claimed a $10,357 charitable contribution deduction on her 2009 return, consisting of $6,490 in cash contributions and $3,867 in noncash contributions.

The cash contribution substantiation was inadequate. The documentation for the non-cash portion wasn’t any better (my emphasis):

With respect to the noncash charitable contributions, petitioner attached a Form 8283 to her 2008 and 2009 return, showing several contributions of property for each year, with each contribution of property valued over $250. To substantiate the contributions, petitioner submitted donation receipts from the Purple Heart, the National Children’s Center, the Lupus Foundation of America, Inc., and the Vietnam Veterans of America. Each of the donation receipts is deficient in one way or another, lacking either a date of contribution or a description of the property contributed, or both. Furthermore, the donation receipts neither reconcile with petitioner’s Form 8283 nor provide anything more than vague descriptions of the items donated.

Every practitioner who has been doing 1040 work for very long has seen things like this — say a round “$2,000″ for, say, “10 bags, clothes — Goodwill.”  Or, sometimes, $7,000 (that never works; good luck finding a “qualified appraiser” for your old laundry). No receipts, or maybe an unsigned slip of paper that says “10 bags” from the donee. That doesn’t meet the requirements for a “statement” showing a “description of any property given.” The outcome:

Accordingly, we find that for each year in issue, petitioner has failed to establish entitlement to a charitable contribution deduction for donations of property in greater amounts than those now allowed by respondent.

The Moral? The deduction for household goods is not a freebie. If you are claiming it for over $250, you have to meet documentation requirements similar to those for cash donations. Even if you took pictures of the items before donating them, you lose without the statement from the donee.

Cite: Jalloh, T.C. Summ. Op. 2015-18.

 

Wind turbinePutting the green in renewable energy tax creditsTax Analysts’ Brian Bardwell tells us ($link) how green energy credits worked in Oregon:

The Oregonian reported at the end of February that the Oregon University System had claimed credits under that later deadline, saying that it had already begun work on a $27 million installation of solar arrays across its seven main campuses. And although then-Gov. John Kitzhaber used a golden shovel in a 2011 groundbreaking ceremony, contractor Renewable Energy Development Corp. — known as Redco — had not yet obtained building permits for the project or even finished its design plans, the paper reported.

But the DOE approved credits for the program, apparently relying on invoices from a nonexistent company indicating that it had already begun installing the foundations for solar racks at each of the campuses.

Following the reports, DOE Director Michael Kaplan called on the Oregon Department of Justice to investigate the case.

The program had some things in common with Iowa’s film credit program:

Relatively modest to start, the program grew quickly, with lawmakers approving an ever-growing list of eligible projects, increasing the maximum credit from $2 million to $20 million, removing the overall program cap, and allowing some claimants to transfer their credits.

As the program became more unwieldy and the DOE struggled to administer it, the legislature began winding it down…

This is related to the scandal that forced Governor Kitzhaber to resign. Special industry incentives are inherently corrupt, even if nobody in government is on the take, because they reward insiders at the expense of the body of taxpayers, known genericly as “chumps.” (for you Illinois readers, that’s the same as chumbolones).

More coverage at oregonlive.com: Oregon’s signature solar energy project built on foundation of false hopes and falsehoods

 

TaxGrrrl, Heart Surgery & Hospital Stays: Deducting Medical Expenses On Your Tax Return. An intrepid tax blogger finds a tax angle in her father’s heart surgery. We wish him a speedy recovery.

William Perez has Concise Guide to Schedule C for all you self-employeds.

Robert Wood, Wesley Snipes Lands NBC Show Endgame. Why His IRS Endgame Failed. “Stay away from crazy arguments.”

 

Alan Cole, Tom VanAntwerp, Richard Borean, Where Do Americans Take Their Retirement Income? (Tax Policy Blog).

20150310-1

Warm places and lake country, it looks like.

 

TaxProf, The IRS Scandal, Day 670. This missing email stuff seems to be a pattern.

So what? The Rich Get (Much) Richer Under The Rubio-Lee Tax Plan (Tony Nitti). If it helps everyone else more than any other plan, why is that a problem?

Kay Bell, Tax simplification is focus of yet another Capitol Hill hearing.

Peter Reilly,  Pensacola Shows Little Interest In Kent Hovind Trial

Simon Johnson, Dynamic Scoring Forum: The Dangers of Dynamic Scoring (TaxVox)

IMG_1395

Martin Sullivan, “Beep, Beep” — Korean Singer YoonA Wins Model Taxpayer Award (Tax Analysts Blog):

She is one of eight members of the wildly popular band Girls Generation which has recorded such hits as Beep-Beep and Do the Catwalk. And now . . . she is the recipient of a presidential award from the South Korean government for being a dutiful and honest taxpayer who has made a significant financial contribution to her country.

We don’t expect an award, but it would be nice if the IRS would at least send a thank-you note.

Share