Posts Tagged ‘Russ Fox’

Tax Roundup, 8/20/14: Keeping time reports isn’t just for CPAs anymore.

Wednesday, August 20th, 2014 by Joe Kristan

20120511-2Track your hours now, not when you get audited.  Doing time reports is no fun.  If I had a nickel for every CPA who left public accounting and told me how fun it is to not do time reports, I’d have multiple nickels.

Unfortunately, the tax law might make time sheets necessary for people who don’t charge by the hour.  The passive loss rules disallow losses if you don’t spend enough time on a loss activity to “materially participate.”  Obamacare uses the same rules to impose a 3.8% “Net Investment Income Tax” on “passive” income.

It’s up to the taxpayer to prove they spent enough time to “materially participate,” as a Mr. Graham from Arkansas learned yesterday in Tax Court.

The taxpayer wanted to convince Judge Nega that he met the tax law’s stiff tests to be a “real estate professional,” enabling him to deduct real estate rental losses.  If you are not a “professional,” these losses are automatically passive, and therefore deferred until there is passive income.  To be a real estate professional, the taxpayer has to both:

– Work at least 750 hours in real estate trades or businesses, and

– performs more than one-half of all personal services during the year in real property trades or businesses in which the taxpayer materially participates.

That’s a high bar to clear for a taxpayer with a day job.  Mr. Graham gave it a good try, providing a judge with spreadsheets to show that he did that work.  The judge remained unconvinced:

Mr. Graham did not keep a contemporaneous log or appointment calendar tracking his real estate services. His spreadsheets were created later, apparently in connection with the IRS audit. 

There were other problems:

Furthermore, the entries on the spreadsheets were improbable in that they were excessive, unusually duplicative, and counterfactual in some instances. As all petitioners’ rental properties were single-family homes, reporting 7 hours to install locks or 30 hours to place mulch on a single property (amongst other suspect entries) are overstatements at best. Performing maintenance for a tenant that did not pay rent for an entire year with no record of “past due rent” or any attempt to collect rent (as Mr. Graham would note on entries for other rental properties) seems dubious.

The judge ruled that the taxpayer failed to meet the tests.  Worse, the court upheld a 20% penalty: “We conclude that the exaggerated entries in petitioners’ spreadsheets negate their good faith in claiming deductions for rental real estate losses against their earned income.”

The Moral?  Maintain your time records now.  When the IRS comes calling, it’s too late.  And play it straight; the Tax Court didn’t just fall off the turnip truck.

Cite: Graham, T.C. Summ. Op. 2014-79. 

 

20130426-1Russ Fox, FBAR Filing Follies:

Joe Kristan reported last week that you cannot use Adobe Acrobat to file the FBAR; you must use Adobe Reader. In fact, if you have Adobe Acrobat installed on your computer and use Adobe Reader it won’t work either. Well, I have some mild good news about this.

Mild is right.

 

Peter Reilly, Robert Redford’s New York Tax Trouble Provides Lessons For Planners.  “You dodge non-resident state taxes, either on purpose or by accident, at the peril of missing out on a credit against the tax of your home state.”

Jason Dinesen, S-Corporation Compensation Revisited.  “But what should the salary be? And what if the year has ended and the W-2 deadlines have passed, but the corporate tax return still needs filed?”

Keith Fogg, Postponing Assessment and Collection of the IRC 6672 Liability (Procedurally Taxing).  Issues on the “trust fund” penalty imposed for not remitting withholding.

TaxGrrrl, Flipping Through History: Online Retailers Owe Popularity And Tax Treatment To Mail Order Catalogs:

Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state.

And just like in the old days, states want to extend their reach no matter how flimsy the nexus.

20140729-1Lyman Stone, New Upshot Tool Provides Historical Look at Migration (Tax Policy Blog):

Prominent changes in the data suggest that taxes may have a role in affecting migration, though certainly taxes are just one of many important variables, and probably not even the biggest factor. As always, talking about migration isn’t simple: migration data is challenging to measure and represent, and even more difficult to interpret.

I will be seeing Mr. Stone speak at the Iowa Association of Business and Industry Tax Committee this morning.  I’m geeking out already.

 

Jim Maule, “Give Us a Tax Break and We’ll Do Nice Things.” Not.  It seems the subsidized Yankees parking garages don’t stop with picking taxpayer pockets.

Kay Bell, Is it time for territorial taxation of businesses and individuals?  “Territorial taxation advocates hope that long local journey has at least now started.”

 

Howard Gleckman, Is Treasury About to Curb Tax Inversions on Its Own? (TaxVox).  If the law is whatever the current administration says it is, I look forward to the $20 million estate tax exclusion next time the GOP takes power.

Daniel Shaviro, The Obama Administration’s move towards greater unilateral executive action.  “And the conclusion might either be that one should tread a bit lightly after all, or that we are in big trouble whether one side unilaterally does so or not, given the accelerating breakdown of norms that, as Chait notes, are no less crucial than our express constitutional and legal structure to ‘secur[ing] our republic.'”

20130422-2The best and the brightest in action.  TIGTA: ObamaCare Medical Device Tax Is Raising 25% Less Revenue Than Expected, IRS Administration of Tax Is Rife With Errors (TaxProf)

 

TaxProf, The IRS Scandal, Day 468

 

News from the Profession.  AICPA Celebrates 400,000th Member Just Because (Caleb Newquist, Going Concern)

I can verify that a Kindle absorbs less coffee than paper.  Do readers absorb less from a Kindle than from paper? (Tyler Cowen)

 

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Tax Roundup, 8/18/14: Tax Credits for housing. And for Elvis!

Monday, August 18th, 2014 by Joe Kristan

The Des Moines Register is running a series on Jack Hatch, the Democratic nominee for Iowa Governor, focusing on subsidized housing projects he developed.  The stories include Jack Hatch’s record shows no clear conflicts of interest and Review shows Hatch followed public financing rules.

The Register finds no evidence of illegality in Sen. Hatch’s tax credit-driven deals.  That’s unsurprising, as the tax credits are shared with investors, who want clean tax projects and impeccable tax breaks.  As usual with tax incentives, though, the scandal is what is perfectly legal.

The series describes the financing of some projects.  For example:

20140816-1

 

A $6.5 million development with over $8 million in government aid.  A sweet deal, if you are one of the lucky participants of an oversubscribed subsidy program.

While such projects are touted as achieving “affordable housing,” the real beneficiaries are arguably well-connected developers and tax shelter investors.  It’s all legal, and all paid for by the rest of us.

If the real goal is to help the poor, there are better ways than a Rube Goldberg tax credit system running the aid through tax shelter developers and investors.  Arnold Kling’s idea to provide the poor with a universal flexible benefit “to replace all forms of means-tested assistance, including food stamps, housing subsidies, Medicaid, and the EITC, with a single cash benefit,”  is a more promising approach.  It is what a program designed to help the poor, rather than the connected, would look like.

 

Elvis20140818-3Kay Bell, Elvis estate seeks tax breaks for Graceland expansion.  Or what?  Graceland is going to leave Tennessee?  Elvis will leave the building?  But, but, jobs!  Or something.

Robert D. Flach, KEEP COPIES OF YOUR W-2s FOREVER!  Robert explains how he was able to use old W-2s to help a client show that his retirement contributions were “after tax” for New Jersey purposes, preventing a second tax on withdrawal.

Tony Nitti, New Opportunities Exist For S Corporation Shareholders To Deduct Losses

William Perez, Got a Call From the IRS? It’s Probably Not the IRS.  A client of our office got such a scam call last week.  We told them to hang up if they call back.

Jack Townsend, Tidbits on the New Streamlined Procedures

Annette Nellen, Better identity theft efforts – S. 2736

 

20140818-1Jason Dinesen, Why an LPA?  Jason answers the question “Why did I pursue an Iowa “Licensed Public Accountant” designation? LPAs are an obscure lot, in that we only really exist in 3 states (Iowa, Delaware and Minnesota).”

Peter Reilly, IRS Stampedes A Cattle Shelter.  Peter explains why losing a hobby loss case is extra bad.  With a bonus quote from me (Thanks, Peter!).

Tax Trials, Record Your Easement: Tax Court Adjusts Timing & Valuation of New York Facade Easement

 

TaxGrrrl, From AR-15s To Rubber Bullets: How Did Police End Up With Military Gear On American Streets?  Your tax dollars at work.  Amazingly, no tax credits appear to be involved.

TaxProf, The IRS Scandal, Day 466.  It appears the judge who told the IRS to explain what happened to the Lois Lerner emails isn’t yet satisfied with the IRS response.  More from Russ Fox: Judge Sullivan Not Impressed by the “Dog Ate my Homework” Excuse.

20140818-2Ajay Gupta, Demagoguing the ‘I’ Words. (Tax Analysts Blog) “If an inversion exploits a loophole, then so does every other corporate reorganization that painstakingly adheres to the requirements of the code and regs.”

Steven Rosenthal, Can Obama slow corporate inversions? Yes he can.  Silly rabbit.  The idea isn’t to slow corporate diversions; it’s to demonize them for political fun and profit.  And his idea of reviving the moribund Sec. 385 debt-equity regulations for this purpose shows how much the inversion panic has parted from reality.

 

News from the Profession.  Here’s Further Proof That Accounting Firms Need a Charge Code for “Wasting Time on Internet” (Caleb Newquist, Going Concern)

 

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Tax Roundup, 8/12/14: FBAR Filing, some acrobatics required.

Tuesday, August 12th, 2014 by Joe Kristan

No Walnut STThe foreign financial account reporting system is said to be all about keeping people from evading taxes by hiding assets overseas.  I’m starting to think that it is really just a strange sadistic plan to torture random taxpayers for fun and profit.  Consider:

– The FBAR filings are not part of the tax returns everyone files anyway.

– They are due at separate times from regular tax filings.

– The Treasury claims the timely mailed (or transmitted) = timely filed rule doesn’t apply to FBAR filings, unlike all other tax filings.

– The filing system is entirely separate from other tax return systems, including a separate bureaucracy and facilities.

Support for my theory comes from today’s report by Tax Analysts ($link):

Taxpayers cannot file a foreign bank account report electronically if they have a copy of popular software programs such as Adobe Acrobat installed on their computers because the programs conflict with the FBAR electronic filing portal, Tax Analysts has learned.

The only way to resolve the problem is to uninstall the conflicting programs and install a copy of Adobe Reader, according to instructionsfrom the Financial Crimes Enforcement Network’s Bank Secrecy Act (BSA) e-filing help desk. The conflict was confirmed by a help desk employee.

FinCEN mandated e-filing of FBARs as of July 1, 2013. According to a FinCEN FAQ, failure to comply with the electronic filing mandate could result in civil penalties, including a $500 fine for each negligent currency transaction.

The FBAR system is way overdue for an overhaul.  Some obvious steps:

– Raise the foreign account filing threshold drastically — say to $100,000 or $200,000 from the current $10,000.  This would keep thousands of Americans working overseas, and thousands more Green Card holders workers from having to risk enormous fines for foot-fault violations.

– Moving the FBAR filing to the regular tax return system, with the same filing locations and due dates.   Currently filing is with “FincCEN,” which is creep-ese for the Financial Crimes Enforcement Network — which helps lead to the government presumption that committing personal finance while overseas is a crime.

– Making sure “timely mailed = timely filed” applies to FBAR reports.

Still better would be to join the developed world in imposing the income tax on a territorial basis, rather than on worldwide income.

Requiring taxpayers to screw around with their computer setup just to meet their FBAR requirements is outrageous.  Even if FBAR filing is not merely a sadistic plot — and it sure acts like one — it seems more designed as a hook to punish violators — purposeful and accidental —  than a way to gather compliance information.  As usual, Congress goes after a small set of violators by firing into the crowd.

 

Russ Fox, Bears Sacked; Lose Court Case Worth $4.1 Million.  “No, Jay Cutler didn’t throw one of his usual interceptions. Instead, Judge Mary Mason of the 1st District Illinois Appellate Court ruled that the Chicago Bears had underpaid Cook County’s Amusement Tax.”

Paul Neiffer, How Does Section 179 Work?

Robert D. Flach has your fresh Tuesday Buzz!

 

20120510-1TaxProf, The IRS Scandal, Day 460

Kyle Pomerleau, Two New Reports on the “New Markets Tax Credit”  (Tax Policy Blog):

This week, the Government Accountability Office (GAO) released a report on “New Markets Tax Credits” (NMTC) at the request of Senator Tom Coburn (R-OK). In addition, Senator Coburn also released a report of his own outlining the program.

New Market Tax Credits were introduced in 2000 as part of the Community Renewal Tax Relief Act of 2000. The NMTC were meant to encourage investment in low-income areas that don’t have access to capital.

The credit works by giving an investor a tax credit equal to 39 percent of the initial investment the investor makes in a project. This means for every $100 in an investment, an investor will receive a $39 tax credit. The credit is distributed over seven years. From 2003 to 2013, the program has cost the federal government $40 billion.

While the credit is meant to help fund projects in low-income areas, it has actually benefitted banks substantially. GAO and Coburn’s report outline significant issues with the program.

Imagine that.

Jeremy Scott,Kansas and Missouri Show the Dangers of Tax Competition (Tax Analysts Blog):

For the last two decades, U.S. states have found themselves competing with their neighbors to attract domestic investment and relocations. And as Missouri and Kansas are learning, the real losers in tax competitions are taxpayers and state budgets.

The winners? The well-connected, fixers, middlemen, and politicians.

Career Corner.  Rat Out Your Employer On Taxes. Win Cash Rewards! (Walter Olson, Reason.com)

 

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Tax Roundup, 8/11/14: Don’t you dare agree with me edition.

Monday, August 11th, 2014 by Joe Kristan

microsoft-appleDavid Brunori notes ($link) some odd behavior by Good Jobs First, a left-side outfit that has been on the side of the angels by highlighting the baneful effects of corporate welfare tax incentives.  The American Legislative Exchange Council came out with a report blasting cronyist tax incentives, and rather than embracing the report, Good Jobs First ripped it — because the Koch Brothers are the Devil:

Yet, Good Jobs First slams ALEC because many recipients of tax incentives have close ties to ALEC. But so what? The fact that corporations, including those run by the Koch brothers, provide support to ALEC doesn’t diminish the argument that incentives are terrible.

Weirdly, Good Jobs First primarily blames the recipients of corporate welfare for taking the money, rather than the politicians who give it away:

Moreover, Good Jobs First inexplicably says that ALEC is wrong to blame policymakers rather than the companies that receive incentives. But the blame for those horrible policies rests squarely on the shoulders of lawmakers and governors who perpetuate them. In a world where the government is handing out benefits to anyone who asks, it’s hard to fault the people who line up for the handout. No one has been more critical of tax incentives than I, but I’ve never blamed the corporations. Nor do I blame the army of consultants and lawyers who grease the wheels to make incentives happen. There’s no blame for anyone other than the cowardly politicians from both parties who can’t seem to resist using those nefarious policies.

Precisely correct.  When somebody is handing out free money, it’s hard to turn it down when your competitors are taking all they can.

I have seen smart people I respect do everything short of donning tin-foil hats when talking about the Koch Brothers and their dreadful agenda of influencing the government to leave you alone.  Maybe everyone needs an Emmanuel Goldstein.

Adam Michel, Scott Drenkard, New Report Quantifies “Tax Cronyism” (Tax Policy Blog)

Annette Nellen, What about accountability? California solar energy property.  Green corporate welfare is still corporate welfare.

 

20130121-2Russ Fox, Where Karen Hawkins Disagrees With Me…  The Director of the IRS Office of Preparer Responsibility commented on Russ’ post “The IRS Apparently Thinks They Won the Loving Case.”  Russ replies to the comment:

Ms. Hawkins is technically correct that Judge Boasberg’s order says nothing about the use of an RTRP designation. However, the Order specifically states that the IRS has no authority to create such a regulatory scheme. If there isn’t such a regulation, what’s the use of the designation?

The courts closed the front door to preparer regulation, so the IRS is trying to find an unlocked window.

 

TaxGrrrl, IRS Imposes New Limits On Tax Refunds By Direct Deposit.  “Effective for the 2015 tax season, the IRS will limit the number of refunds electronically deposited into a single financial account (such as a savings or checking account) or prepaid debit card to three.”

This seems like a measure that should have been put in place years ago.  The Worst Commissioner Ever apparently had other priorities.

 

Kay Bell, Actor Robert Redford sues NY tax office over $1.6 million bill.  The actor gets dragged into New York via a pass-through entity in which he had an interest — a topic we mentioned last week.

Renu Zaretsky, August Avoidance: Corporate Taxes and Budget Realities.  The TaxVox headline roundup covers inversions, gridlock, and Kansas.

Peter Reilly, Org Tries Exempt Status Multiple Choice – IRS Answers None Of The Above

 

 

20140811-1Ajay Gupta, The Libertarian Case for BEPS (Tax Analysts Blog)  BEPS stands for “Base Erosion and Profit Shifting.”

Matt Gardiner, Inversions Aside, Don’t Lose Sight of Other Ways Corps. Are Dodging Taxes (Tax Justice Blog).  Don’t worry, Matt.  If I did, my clients would take their business elsewhere.

Robert D. Flach, HEY MR PRESIDENT – DON’T SHOOT THE MESSENGER!  “If there is something wrong with the Tax Code do not blame the accountant or tax professional.  We have a moral and ethical responsibility to bring to our clients’ attention all the legal deductions, credits, loopholes, techniques, and strategies that are available to reduce their federal and state tax liabilities to the least possible amounts.”

 

Roger McEowen, Federal Court, Contrary To U.S. Supreme Court, Says ACA Individual Mandate Not a Tax.

Jack Townsend, U.S. Forfeits Over $480 Million Stolen by Former Nigerian Dictator.  The headline is misleading — the U.S. received the cash in a forfeiture — they seized it, rather than forfeiting it.

 

2140731-3TaxProf, The IRS Scandal, Day 459

Instapundit, GANGSTER GOVERNMENT: Inspectors general say Obama aides obstruct investigations.  The majority of the 78 federal inspectors general took the extraordinary step of writing an open letter saying the Administration is blocking their work as a matter of course.  The IRS stonewalling on the Tea Party scandal is part of the pattern.

 

 

News from the Profession. It’s Completely Understandable Someone Might Sign Over 200 Audit Reports By Mistake (Adrienne Gonzalez, Going Concern)

You mean they didn’t shift to organic carrot juice?  “From Coke to Coors: A Field Study of a Fat Tax and its Unintended Consequences” (Via Maria Koklanaris at Tax Analysts):

Could taxation of calorie-dense foods such as soft drinks be used to reduce obesity? To address this question, a six-month field experiment was conducted in an American city of 62,000 where half of the 113 households recruited into the study faced a 10% tax on calorie-dense foods and beverages and half did not. The tax resulted in a short-term (1-month) decrease in soft drink purchases, but no decrease over a 3-month or 6-month period. Moreover, in beer-purchasing households, this tax led to increased purchases of beer.

I’m sure the politicians who want to run everyone’s diet will angrily demand higher beer taxes in response.

 

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Tax Roundup, 8/6/14: Telemarketing isn’t an airplane. And: inversion hysteria, always in style.

Wednesday, August 6th, 2014 by Joe Kristan

20120529-2Is your airplane any of your business?  The Tax Court yesterday dealt with a problem that will arise a lot as taxpayers struggle with the new 3.8% Obamacare Net Investment Income Tax: what “activities” can be considered to be part of a single business?

The issue comes up because “passive” activities are subject to the tax, while non-passive activities are exempt.  It is especially important when S corporations are involved because their K-1 income is also exempt from the 2,9 Medicare tax and the .9% Obamacare Medicare surtax.  The status of activities as “non-passive” usually depends on the amount of time spent working in the activity; if you can combine activities they are less likely to be passive.

Tax Court Judge Buch outlines yesterday’s case:

 Mr. Williams is an aviation buff who owns a business that is unrelated to aviation. He purchased an airplane that he made available for rent, used for personal purposes, and used in his other business. On the Williams’ joint tax returns, they offset losses related to the ownership of the airplane against their income from the other business. Respondent disallowed those offsets… 

Passive losses cannot offset non-passive income under the 1986 passive loss rules; they carry forward to offset future income until the activity is sold.  Mr. Williams reported the airplane expenses as part of his business of training telemarketers.  The court reviews the rules on combining activities (footnotes omitted; my emphasis):

Section 1.469-4(c), Income Tax Regs., sets rules for determining what constitutes a single “activity”. That regulation provides: “One or more trade or business activities or rental activities may be treated as a single activity if the activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of section 469.” Whether activities constitute an “appropriate economic unit” depends on the facts and circumstances, giving the following five factors the greatest weight:

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

(ii) The extent of common control;

(iii) The extent of common ownership;

(iv) Geographic 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.)

The judge said the airplane wasn’t part of the same “economic unit” as Mr. Williams’ other business, called WPP:

The fact that there was no meaningful interdependence between the ownership of the airplane and the business of WPP is evidenced in part by the fact that Mr. Williams would rent another airplane for travel because he could earn more from renting WPP’s airplane to other pilots or pilot trainees than he would pay if he or WPP rented another airplane for a trip. Further, most of the airplane’s use and income came from renting the airplane outside WPP, which had no effect on the business of WPP. Likewise, there is no indication that the airplane activity depended on WPP; it was only an occasional user of the airplane. There is no evidence that WPP and the airplane activity had any of the same customers or that the two activities were integrated in any meaningful way.

When the airplane activity was separated his other business, Mr. Williams was unable to muster enough hours to reach “material participation,” making the airplane losses passive and non-deductible.

What does this mean in planning for the NIIT?  Taxpayers get to revisit their activity groupings for 2013 and 2014 returns.  Taxpayers with multiple businesses will want to ponder what things they can realistically combine.  Just because you own both businesses doesn’t mean the tax law will consider them an “appropriate economic unit.”

Cite: Williams, T.C. Memo 2014-158

 

20140805-3Paul Neiffer, IRS Provides Two Optional Methods for SE Health Insurance Deduction.

Jack Townsend, Whistleblower Award for FBAR Penalties?

Jason Dinesen, Kudos to NAEA for Promoting EAs.  Not to sound dumb, but isn’t that what the National Association of Enrolled Agents is supposed to do?

Russ Fox, The IRS Apparently Thinks They Won the Loving Case.  “In Loving v. IRS, the IRS was permanently enjoined from the Registered Tax Return Preparer designation. One would think that the IRS would realize this and remove the designation from forms.”

Keith Fogg, How Bankruptcy Can Create a Pyrrhic Victory out of a Tax Court Win (Procedurally Taxing)

 

Peter Reilly, FAIR Tax Abolishes IRS – Then What?  I have long thought the fair tax was half-baked gimmick, deceptively marketed.  If you want to move to a consumption tax, move to a real consumption tax.

Adam Michel, What is the Consumed Income Tax?  (Tax Policy Blog)

 

 

Allison Christians, Regulating Return Preparers: A Global Problem for the IRS:

The problem of regulating all foreigners in service of U.S. citizenship taxation plagues FATCA in the details, and it will plague the project of tax return preparer regulation as well. It won’t be easily solved unless Congress can accept that the universally practiced norm of residency-based taxation is really the only viable option in a globalized world. If not, as the world adjusts to the ongoing expansion of U.S. regulatory power through more — and more complex — financial regulation, everyone will have to accept that virtually every tax move Congress makes has global implications.

Via the TaxProf.

Just what the world needs: more IRS.

 

nra-blue-eagleDavid Brunori, Keep the Inversion Hysteria Out of the States (Tax Analysts Blog).  “A company’s decision to invert is no different from an individual’s decision to live in a state without an income tax or to buy a house rather than rent to take advantage of a tax break.”  But, but, what about your loyalty oath?  You must hate America!  Or, worse, Iowa!

Scott Hodge, More Perspective on Inversions: Not a Threat to the Tax Base but the Face of U.S. Uncompetiveness (Tax Policy Blog)

Bob McIntyre, Statement: Despite Walgreens’ Decision, Emergency Action Is Still Needed to Stop Corporate Inversions (Tax Justice Blog, where inversion hysteria is always in style).

Eric Toder, How Political Gridlock Encourages Tax Avoidance (TaxVox)

 

Joseph Thorndike, The Origination Clause? Let It Go (Tax Analysts Blog).  Since the courts allow the Senate to strip any house bill of its text and replace it with revenue provisions, it’s pretty much dead already.  And that’s a shame.

 

Your legislators at work: 

Chicago lawmaker pleads to misdemeanor; faced 17 felonies. ““I’m sorry I underestimated my taxes.”

Fattah Jr. released on bail following U.S. indictment on theft, fraud and tax-evasion charges.  The son of a Congresscritter has tax issues? The apple doesn’t fall far from the tree.

 

TaxProf, The IRS Scandal, Day 454

Career Corner.  Career Limiting Moves: A Beginner’s Guide (Leona May, Going Concern).

 

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Tax Roundup, 7/7/14: IRS stands down on imaginary 750-hour rule for real estate pros. And: the real IRS budget problem.

Monday, July 7th, 2014 by Joe Kristan

No Walnut STA newly-released memo indicates that the IRS will no longer hold real estate professionals to an illegal standard in determining passive losses.  

ILM 201427016 addresses how the “750-hour test” of Section 469 applies when you have multiple real estate activities.  Under the passive loss rules of Section 469, rental real estate losses are normally passive; that means the losses are normally deductible only to the extent of other passive income, until the activity is sold.

A special rule allows real estate professionals to apply the normal passive loss rules, which are based on time spent in the activity, to rental real estate losses.  To qualify as a real estate pro, you have to meet two tests:

You have to spend more than 750 hours in the taxable year working in real estate trades or business in which you materially participate, and

You have to spend more time in your real estate activity than in any other kind of activity (this test means that few people with non-real estate day jobs qualify as real estate pros).

In some cases the IRS has applied the 750 test to each activity — making it almost impossible for many taxpayers to qualify, absent an election to treat all rental real estate activities as a single activity under Reg. Sec. 1.469-9(g).  The Tax Court issues a couple opinions that seemed to agree — opinions that I insisted were wrong.

Now the IRS seems to have come around.  From the new IRS memo (my emphasis):

Therefore, whether a taxpayer is a qualifying taxpayer within the meaning of section 469(c)(7)(B) and Treas. Reg. § 1.469-9(b)(6) depends upon the rules for determining a taxpayer’s real property trades or businesses under Treas. Reg. § 1.469-9(d), and is not affected by an election under Treas. Reg. § 1.469-9(g). Instead, the election under Treas. Reg. § 1.469-9(g) is relevant only after the determination of whether the taxpayer is a qualifying taxpayer. However, some court opinions, while reaching the correct result, contain language which may be read to suggest that the election under Treas. Reg. § 1.469-9(g) affects the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Jafarpour v. Comm’r, T.C. Memo. 2012-165, and Hassanipour v. Comm’r, T.C. Memo 2013-88. However, other court opinions recognize that the election under Treas. Reg. § 1.469-9(g) is not relevant to the determination of whether a taxpayer is a qualifying taxpayer. See, for example, Trask v. Comm’r, T.C. Memo 2010-78. 

One hopes the IRS will no longer raise this false issue on examination.

Related: Did the Tax Court just abandon the ‘750 hours for every rental activity’ test?

 

20130426-1Paul Neiffer, IRS Modifies Offshore Voluntary Disclosure Program (OVDP).  “I have personally worked with clients that were involved in the old voluntary disclosure program and I can tell you it is not a pleasant experience.”

Jack Townsend, Rumors on the Workings of Streamlined Programs (Including Transitioning in OVDP).  Reading this, it sounds more like a diabolical bureaucratic torture than a serious attempt to bring the non-compliant into the system.

 

Robert D. Flach, A RANDOM THOUGHT ABOUT THE NEW VOLUNTARY AFSC PROGRAM.  A pithy lesson on the difference between qualifications and credentials.

 

Jason Dinesen, Life After DOMA: A History of Marriage in the Tax Code 

Keith Fogg, When and Where to Make Your Arguments (Procedurally Taxing).  In tax controversies, making the right argument does no good unless you make it at the right time.

 

 

TaxProf, The IRS Scandal, Day 424.   The New York Times thinks the real scandal is that GOP appropriators won’t give the IRS more money to use against them.

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.

Scott Hodge, The IRS Needs Tax Reform Not a Bigger Budget:

The relentless growth of credits and deduction in the code over the past 20 years had made the IRS a super-agency, engaged in policies ranging from delivering welfare benefits to subsidizing the manufacture of energy efficient refrigerators.

I would argue that were we starting from scratch, these are not the functions we would want a tax collection agency to perform. Tax reform would return the IRS to its core function—simply collecting revenues to fund the basic operations of government.

Amen.  I’ve said much the same thing: “Every year Congress gives the IRS more to do.  It has become a sprawling superagency administering programs from industrial policy (R&D credits, export subsidies, manufacturing subsidies) to historic preservation, housing policy to healthcare.”

If Congress stopped using the tax law as the Swiss Army Knife of public policy, the current IRS budget would be plenty.

 

20120503-1Christopher Bergin, What’s Behind the Brain Drain at the IRS?  (Tax Analsyts Blog):

So what’s going on? Is this an internal war at the tax agency, specifically in LB&I – a power struggle, if you will? Or is it the more predictable result of competent IRS leaders, who could easily make more money in the private sector, deciding to escape an agency that is being treated like a political piñata? Or is this the new IRS commissioner cleaning house? For me, the latter is the least likely.

Yeah, the new Commissioner is more into closing the blinds to the house so we don’t see the mess, rather than cleaning it up.

 

TaxGrrrl, European Commission Broadens Tax Inquiries To Include Amazon: Google, Microsoft & McDonald’s May Follow   

Renu Zaretsky, Congress Is Back with Much To Do and Consider (TaxVox).  Today’s tax headline roundup covers this week’s Congressional agenda, inadequate retirement savings, and the EU’s efforts to crack down on multinationals.

 

Russ Fox, Pop Goes the Tax Fraud  A rapper, a Canadian, and a football player walk into before the bar…

The 70th anniversary of a red letter day for my Dad.  July 5, 1944.

 

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Tax Roundup, 7/1/14: Where the IRS budget really goes. And: IRS ends automatic expiration of foreign tax ID numbers.

Tuesday, July 1st, 2014 by Joe Kristan

Dang.  “We do not hold, as the principal dissent alleges, that for-profit corporations and other commercial enterprises can ‘opt out of any law (saving only tax laws) they judge incompatible with their sincerely held religious beliefs.'” — from the majority opinion in yesterday’s Hobby Lobby Supreme Court decision.

Had they allowed a religious exception to the tax law, all the world religions would quickly develop wildly-popular sects with a doctrinal allergy to tax, and, well,  lots of things.

 

Instapundit links to this chart where it looks like IRS spending is out of control

IRS total 20140701 cato

And I think it is — but not in the obvious way.  The Cato Institute, source of the first chart, also provides this:

IRS budget cato 20140701

It shows that almost all of the massive increase in IRS spending is from refundable credits, which are counted as part of IRS spending in the first chart.  But money given away through the Earned Income Tax Credit is not available for auditing taxpayers or buying additional backup tapes.

That, of course, doesn’t excuse the IRS malfeasance in the Tea Party scandal.  It does show that even as Congress has piled more responsibilities on the IRS — especially via Obamacare — it hasn’t provided additional resources.  Now that one party has seen that the IRS has been acting institutionally as its opposition, the agency is unlikely to get significant new resources as long as that party controls one house of Congress — even less so if the GOP takes the Senate, too.

Meanwhile, rather than trying to conciliate and reassure Congressional Republicans, Commissioner Koskinen has been defiant and tone-deaf in his response to the Tea Party and email erasure scandals.  The results for tax administration will not be good.

 

Jeremy Scott, IRS Strategic Plan Highlights Effects of Budget Cuts (Tax Anlaysts Blog):

A crippled tax collector means a damaged tax system. And a damaged tax system only hurts taxpayers and the federal government as a whole. Congress should focus more on punishing those responsible for the various missteps at the IRS and less on gutting the nation’s revenue collection and tax administration system as a whole.

That will require the IRS as a whole to stop acting like a partisan agency.

 

20130419-1IRS does something very sensible.  Credit where credit is due:  the IRS has decided to no longer make non-resident aliens renew their tax ID numbers every five years.   From IR-2014-76:

Under the new policy:

  • An ITIN will expire for any taxpayer who fails to file a federal income tax return for five consecutive tax years.
  • Any ITIN will remain in effect as long as a taxpayer continues to file U.S. tax returns. This includes ITINs issued after Jan. 1, 2013. These taxpayers will no longer face mandatory expiration of their ITINs and the need to reapply starting in 2018, as was the case under the old policy.
  • To ease the burden on taxpayers and give their representatives and other stakeholders time to adjust, the IRS will not begin deactivating unused ITINs until 2016. This grace period will allow anyone with a valid ITIN, regardless of when it was issued, to still file a valid return during the upcoming tax-filing season.
  • A taxpayer whose ITIN has been deactivated and needs to file a U.S. return can reapply using Form W-7. As with any ITIN application, original documents, such as passports, or copies of documents certified by the issuing agency must be submitted with the form.

Very welcome, and long overdue.  Obtaining an ITIN is an inconvenient and burdensome process, involving either mailing passports or national ID cards to the IRS — and trusting them to return the documents — or making the often long trip to a U.S. consulate to apply in person.  For foreign residents with long-term U.S. financial interests, the requirement to renew ITINs every five years was a gratuitous and expensive burden.

(Hat tip: Kristy Maitre).

 

BitcoinRobert Wood, What IRS Calls ‘Willful’ May Surprise You–And Mean Penalties, Even Jail.  The lingering IRS threat to impose fines for “willful” FBAR noncompliance for small amounts is unwise; it seems that they are more concerned with missing a few lawbreakers than in bringing foot-fault violators into compliance.

Jack Townsend, Good Article on the Non-Willfulness Certification for Streamlined and Related Issues

TaxGrrrl, IRS Says Bitcoin Not Reportable On FBAR (For Now)   

 

Paul Neiffer, IRS Releases Final Regulations on ACA Small-Business Tax Credit

Robert D. Flach starts out July with a Buzz!

Kay Bell, Supreme Court finds contraceptive tax costs ‘substantially burdensome’ in its ruling for Hobby Lobby stores

 

 

Martin Sullivan, States Should Cede Some Taxing Power to the Feds (Tax Analysts Bl0g):

Given that states’ corporate taxes are here to stay, we should consider making them as painless and low-cost to businesses as possible. One way to do that is for Congress to exercise its authority under the commerce clause of the Constitution and require states to entirely piggyback their corporate taxes on the federal system.

Canada does this, and it does help, but getting rid of state corporate income taxes would help much more.

Liz Emmanuel, Millionaires’ Tax Clears New Jersey Legislature, Faces Likely Veto (Tax Policy Blog)

Renu Zaretsky,The Tax Man Cometh, But Sometimes Collects Less.  The TaxVox headline roundup covers the formal effective date of FATCA (today), Kansas budget woes, and a link to an interactive tool to track state budgets.

 

Russ Fox, IRS Didn’t Tell a Court About the Missing Lerner Emails

TaxProf, The IRS Scandal, Day 418

 

20140508-1I wouldn’t try asking one this question.  What Type of Fruit is a Polar Bear? Petaluma and Interpretive Choice (Andy Grewal, Procedurally Taxing)

Career Corner.  How to Create a CPA Exam Study Schedule That Guarantees Failure (Adrienne Gonzalez, Going Concern)

News from the Profession.  San Diego CPA convicted in elaborate tax evasion scheme:

A federal jury deliberated for 30 minutes before finding Lloyd Irving Taylor, 71, guilty of all 19 counts against him, including aggravated identity theft, making false statements to a financial institution, evading taxes, corruptly impeding the Internal Revenue Service and making false statements on U.S. passport applications.

According to evidence presented at trial, Taylor, who has been in custody since April 2013, stole the identities of deceased minors, used them as aliases and obtained fraudulent passports and other identification papers.

Oh, that’s illegal?

According to witnesses who testified, Taylor failed to report $5 million in income during the span of the fraud and owed the IRS about $1.6 million. During his 42 years of working, Taylor had filed a total of seven tax returns, according to trial testimony.

That’s one every six years.  It took awhile, but the IRS eventually notices something was amiss.

At a bond hearing last year, a judge ordered Taylor detained pending trial based on a number of factors, including his international travel on his false passports, the millions of dollars he controlled through dozens of bank accounts and his numerous false statements to banks.

I suppose the man felt invincible, given how long he apparently went without drawing IRS attention.  Eventually that comes around, though he had quite a 42-year run.  But he did get caught, possibly because of better computer matching and more comprehensive bank reporting.  Don’t count on stringing the IRS out for 42 years yourself.

 

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Tax Roundup, 6/26/14: Misdirected e-mail edition. And: 15 years for tax fairy medium Daugerdas.

Thursday, June 26th, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

The IRS scandal finally found a way to get the Des Moines Register’s attention.  Lois Lerner of IRS sought audit of Grassley, emails say:

The emails show Lerner mistakenly received an invitation to an event that was meant to go to Grassley, a Republican.

The event organizer apparently offered to pay for Grassley’s wife to attend the event.

Instead of forwarding the invitation to Grassley’s office, Lerner emailed another IRS official to suggest referring the matter for an audit, saying it might be inappropriate for the group to pay for his wife.

“Perhaps we should refer to exam?” Lerner wrote.

It was unclear from the emails whether Lerner was suggesting that Grassley or the group be audited — or both.

Grassley-090507-18363- 0032A reader who relies on the Des Moines Register for news might be puzzled over who Lois Lerner is.  A search of the word “Lerner” on the Register’s website only uncovers two other stories related to her role in the scandal: “Steve King calls for abolishing the IRS on Tax Day” (4/15/14) and “Critics: Progress scant after IRS scandal” (3/27/13).  It appears that today’s article would have been the first time Register readers would have learned anything about the mysterious mass deletion of emails relating to the Tea Party scandal.  A devoted Register fan might have been puzzled as to why this seemingly important news hadn’t been mentioned before.

I think there’s a hint down in the article (my emphasis):

Lerner headed the IRS division that processes applications for tax-exempt status. The IRS has acknowledged that agents improperly scrutinized applications by tea party and other conservative groups before the 2010 and 2012 elections. Documents show that some liberal groups were singled out, too.

Nobody buys that last sentence.  While a few “liberal” words were on the list of buzzwords to identify political organizations, no liberal outfits had their donor lists illegally released, or had their exemption applications held up indefinitely with demands for ridiculous detail of the organizations — including the content of their prayers.   Here are the stats:

targetingstats

Now maybe the Register will begin to get its readers up to speed.  If not, the Tax Update is available to Register subscribers at no extra charge!

Meanwhile, the IRS will have to explain to senior Senate taxwriter Grassley just why it needs more resources.  That may be slightly awkward.

TaxProf, The IRS Scandal, Day 413

Russ Fox, Lerner Appears to Have Targeted Iowa Senator Grassley  “Of course, President Obama said earlier this year just that–that there is not even a smidgen of corruption…”

 

tax fairyThe Tax Fairy fails a true believer.  Paul Daugerdas, the Jenkens & Gilchrist attorney who generated over $90 million in fees selling tax shelters, was sentenced to 15 years in federal prison yesterday for his troubles.  Bloomberg reports:

The tax shelters at the center of the case were sold from 1994 to 2004 to almost 1,000 people, creating $7 billion in fraudulent tax deductions and more than $1 billion in phony losses for customers, the U.S. said.

It appears unlikely that Mr. Daugerdas will come out ahead on his tax shelter efforts:

Daugerdas was ordered to forfeit $164.7 million and help pay restitution, with other conspirators, of $371 million. 

While he wasn’t the only Tax Fairy guide during the great turn-of-the-century Tax Shelter frenzy, he was perhaps the most prominent, inventing tax shelters with names like HOMER and COBRA.  The shelters found eager customers among businesses and individuals looking for the Tax Fairy, the legendary sprite believers insist will wave her magic wand and make taxes go away, for a very reasonable fee.    Now Jenkens & Gilchrist is dead, the believers are out their money, plus penalties, and there still is no Tax Fairy.

The Tax Analysts story on the sentencing ($link) had one item that I hadn’t seen before:  “The jurors said that Daugerdas was convicted solely on counts for which the government presented evidence of backdating, when Daugerdas agreed to prepare false tax returns that reported as 2001 losses transactions that occurred in 2002, the defense memo says.”  Way back in 2009, I said this could be his biggest problem at trial: Is backdating the fatal flaw for Daugerdas?:

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating.

This sort of thing separates “aggressive tax planning” from plain fraud.

Related: 

Department of Justice Press Release

Jack Townsend, Daugerdas Gets 15 Year Sentence

TaxGrrrl, Daugerdas Sentenced To Prison, Ending Biggest Tax Prosecution Ever

This one is probably coincidental, but Jason Dinesen, 138 Years Ago Today: Custer’s Last Stand

 

IMG_0216Robert D. Flach, A SUMMER TAX TIP FOR SCHEDULE C FILERS

William Perez, Single Filing Status.  “A person is considered unmarried for tax related purposes if on the last day of the year the person is not married to any other person or is legally separated from a spouse under a divorce or separate maintenance decree.”

Kay Bell, Kids, summer camp tax breaks and our personal X Games site

Peter Reilly, Facade Easement Valuation Cannot Be Percentage Rule Of Thumb 

Cara Griffith, Ohio Enacts Legislation Allowing Creation of Captive Insurance Companies (Tax Analysts Blog).

The answer is clearly more tax credits.  The New Jersey Casino That Tax Credits Could Not Save  (Adam Michel, Tyler Dennis, Joseph Henchman, Tax Policy Blog)

Renu Zaretsky, Expanding a Credit, Simplifying a Break, and Cutting Off a Nose to Spite a Face.  Today’s TaxVox headline roundup covers  IRS funding, student debt, and same-sex marriage complications.

 

 

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Tax Roundup 6/24/14: Koskinen’s political gifts. And: in case you didn’t think Hitler was bad already…

Tuesday, June 24th, 2014 by Joe Kristan

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Just the man to build bridges to Republicans who fund the IRS.  From Bryan Preston, IRS Chief Koskinen Has Donated Big to Democrats Over the Years:

According to the Washington Free Beacon, Koskinen has donated about $100,000 to Democrat candidates and committees since his first donation in 1979. His donor recipients include Gary Hart, the Democratic National Committee, the Democratic nominee in each presidential campaign since 1980 (which would even include Walter Mondale, who stood no chance of beating President Ronald Reagan in 1984), the Democratic Congressional Campaign Committee, and Hillary Clinton’s and Barack Obama’s campaigns. He most recently donated $2,500 to Sen. Mark Warner (D-VA) in 2013.

He has given no money to Republicans.

It’s hard to believe how tone-deaf he is to the Tea Party scandal, but this helps explain it.  (Via Instapundit)

 

Jeremy Scott, Lost Lerner E-mails Latest Example of IRS Death Wish (Tax Analysts Blog), my emphasis:

In contrast to their GOP colleagues, Democrats rushed to Koskinen’s defense. That is, perhaps, understandable, even though much of what the IRS has done during this scandal is indefensible. Democrats probably want to defend their president’s pick to head the IRS, and maybe they want to try to change the narrative heading into a potentially disastrous midterm election. But the reality is that the IRS isn’t doing them any favors. There’s only so much incompetence and disingenuous behavior that can be run through a political spin machine. The Democrats’ reflexive defense of Lerner (whose conduct can’t be excused) and their apparent willingness to accept any explanation from Koskinen (who didn’t even try to adequately explain why he hid information on the lost e-mails from February until late June) is baffling. Democrats weakly attempted to paint the GOP as on a witch hunt for a conspiracy, as though the IRS’s mismanagement and appearance of bias weren’t enough to justify congressional inquiry.

The IRS isn’t doing Democratic congresscritters any favors, nor are they doing any for the IRS.  They are just making the IRS look more like a partisan agency, which could cripple tax administration for years.

 

TaxProf, The IRS Scandal, Day 411

 

20140507-1Kay Bell, Save space and trees: Digitize your tax records.  That way if you lose them, the IRS will surely understand.

Russ Fox has some valuable information for online gamblers trying to stay FBAR compliant: Online Gambling Addresses (Updated for 2014)

Robert D. Flach has a Tuesday Buzz for you!

Tony Nitti, How State Taxes Could Play A Role In Carmelo Anthony’s Landing Spot.  Nah, state taxes don’t matter…

Peter Reilly, Step Kids Remain Step Kids After Divorce.  So you may still have a dependent, if not a spouse.

Jack Townsend, Comments by IRS Personnel on New Streamlined and OVDP Procedures.  “The new procedures were designed to ‘encourage folks who are considering quiet disclosures to come in with their hands up’ and avoid taxpayers coming into OVDP with the intention to opt out.”

Annette Nellen, Bitcoin Taxation – Clarity and Mystery, “If you are a tax practitioner and don’t think you need to deal with it, I’d be surprised if none of your clients uses bitcoin.”

William Perez, Backup Withholding.

 

Tyler Dennis, The Clinton’s Estate Tax Planning Demonstrates the Arcane Nature of the Estate Tax (Tax Policy Blog):

When the Clintons created the trust in 2011, their property’s assessed value was $1.8 million.  Without a residential trust, the future appreciation between 2011 and 2021 would count against the gift tax. If the property appreciated at a 4% annual rate and reached $2.6 million by 2021, that’s the amount that would count. With the residential trust, though, the Clintons were able to “lock in” the value of the home at its 2011 value of $1.8 million without actually relinquishing the property to the beneficiary of the trust.

Most supporters of higher taxes assume that they won’t have to pay them.

 

Renu Zaretsky, Disbelief, Devolution, and Death Benefits.  The TaxVox headline roundup talks about the Koskinen appearance before the Issa committee, and about how a surprising proportion of new life insurance is taken out on employees.

Andrew Lundeen, The Average U.S. Worker Pays over $16,000 in Income and Payroll Taxes (Tax Policy Blog):

The tax burden is a combination of income taxes at the federal, state, and local levels as well as the employee and the employer payroll taxes. Of the 31.3 percent tax burden, 15.4 percent is due to income taxes and 15.9 percent is due to payroll taxes, over half of which is paid by the employer on the employee’s behalf. (Workers pay the cost of the employer-side payroll taxes through lower wages.) 

Heck of a deal.

 

Stephanie Hoffer, Kuretski, the Tax Court, and the Administrative Procedure Act (Procedurally Taxing).

 

Another great tax planning idea down the tubes.  Kidnapping Prostitutes Is Not a Good Way to Claim Dependents for Tax Purposes (Greg Kyte, Going Concern)

If you didn’t think he was a bad guy already…  Adolf Hitler: Billionaire tax-dodger?

 

 

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Tax Roundup, 6/17/14: Hiring witnesses to your tax crimes. And: some folks just aren’t into Valentines Day.

Tuesday, June 17th, 2014 by Joe Kristan

Programming note:  The Tax Update will be on the road the rest of this week, so this is probably the last tax roundup this week.  Unless I change my mind.

 

Via Wikipedia

Via Wikipedia

Sure, the more witnesses to my crime the merrier.  What could go wrong?  Every time I see a case in which an employer gets in trouble for evading payroll taxes by paying employees in cash, I have to wonder how much they thought things through.  Every employee becomes a potential informant, and it’s hard to imaging not having either a disgruntled employee turn you in or a careless one reveal the secret in the wrong place.

The Department of Justice yesterday announced a guilty plea yesterday:

   Sonny Pilcher of Casper, Wyoming, pleaded guilty to tax fraud today in the U.S. District Court for the District of Wyoming, the Justice Department and Internal Revenue Service (IRS) announced.  The sentencing hearing was set for Oct. 28, 2014 before U.S District Judge Alan B. Johnson.

 According to the charging document, Pilcher attempted to obstruct and impede the IRS.  Pilcher did this by claiming a false bad debt expense of $258,000 on his 2008 Form 1040 tax return, and by paying his employees in cash to evade paying employment taxes.  Pilcher faces a statutory maximum sentence of 36 months in prison, a $250,000 fine and may be ordered to pay restitution to the IRS. 

The inclusion of the “bad debt” in the charge is interesting.  You frequently see cases where people claim a non-business bad debt — which is a capital loss — as an ordinary fully-deductible business bad debt.  While you might see a civil penalty in such a case, I have never seen that called a criminal matter.  This presumably was something more serious than an argument over what kind of bad debt it was.

 

20120801-2If you have a full-time job, you probably aren’t a “real estate professional” who can deduct rental losses.  And if that’s so, don’t embarrass yourself in front of a Tax Court judge.  A taxpayer from California made that mistake in a Tax Court case issued yesterday.

Real estate rental losses are normally passive, meaning that they only are deductible to the extent of passive income (there is a special allowance for taxpayers with adjusted gross income under $150,000).  If you are a “real estate professional,” the losses are not automatically passive, but you have to meet two difficult tests to be one:

– You have to work at least 750 hours in the year in a real estate trade or business which you own, and

– your real estate business has to consume more of your time than anything else you do.

If you have a full-time day job, it is nearly impossible to rise to that standard (unless you have a pretty undemanding day job).  That didn’t keep the intrepid Californian who had three rental properties — all single-family houses — from giving it a try, as the Tax Court judge explains (my emphasis):

Even if we assume that petitioner worked 1,760 hours and 1,752 hours in 2009 and 2010, respectively, for Northrop Grumman, we do not accept his activity log coupled with this testimony relating to the rental activities as reliable or credible. A review of the activity log and testimony relating to the rental activities leads us to the conclusion the petitioner did not spend more hours at the real estate activity than at his full-time employment at Northrop Grumman. According to petitioner’s logs he spent almost every spare hour in those years working on the rental properties, including 10 hours on July 4 of each year, 12 and 10 hours on February 14, 2009 and 2010, respectively, and 9 and 10 hours, respectively, on December 25 of each year.

Hey, not everybody is a romantic.  And I’ll keep Christmas in my own way, thank you very much!

Although he managed three rental properties in each year, throughout 2009 alone petitioner’s records reflect that he repaired or worked on the sprinkler systems on any of the given properties on 64 separate occasions, and throughout 2010 he worked on sprinkler systems on 20 separate occasions. In addition, on March 16 and 17, 2009, the records reflect eight hours to prepare and deliver an eviction notice to be filed in court. Coincidentally, on March 15 and 16 of the next year, petitioner’s records reflect that he performed the very same activity for the same exact amount of time. A review of petitioner’s activity logs leads to the conclusion that the logs are inaccurate and exaggerated.

Maybe he just wasn’t very good at sprinkler systems?  Whatever you might think of Tax Court judges, you can be sure that they didn’t get their jobs by being gullible.

Cite: Bogner, T.C. Summ. Op. 2014-53.

 

 

20130114-1Kristy Maitre, Treasury Issues Changes to Circular 230 (Treasury Decision 9668):

Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing.  Often the disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate.

Treasury said they anticipate that the removal of the requirement will eliminate the use of a Circular 230 disclaimer in e-mail and other writings because Section 10.37 rules on written opinions don’t include the disclosure provisions in the covered opinion rules.

Good news.  I always thought the routine disclaimers were futile and I never used them.  They seemed like the email equivalent of a rabbit’s foot — it might make you feel better, but it still was mere superstition.  Yet I bet that we’ll still be getting emails from our fellow practitioners with the Circular 230 disclaimer years from now.

Russ Fox, Soon: No More Circular 230 Notices

 

Jason Dinesen, Iowa Taxes: Filing Separately and Allocating Dependents.  “In general, a typical married couple can allocate the dependency exemptions in whatever manner they choose.”

William Perez, Child and Dependent Care Tax Credit

Peter Reilly, Paul Reddam’s KPMG Tax Shelter Stunk In More Ways Than One 

TaxGrrrl, World Cup Mania: Figuring Out FIFA, Soccer & Tax.  So there’s a soccer tournament, I hear.

Robert D. Flach starts Tuesday with a Buzz!

 

20140513-1Martin Sullivan, Big Deal by Low-Tax Medtronic Has Even Bigger Implications (Tax Analysts Blog).  “The main benefit to Medtronic after the inversion will be that the billions of profits it generates outside the United States each year can now be deployed to pay dividends and to buy other U.S. companies without paying U.S. tax.”   Sounds like good corporate stewardship to me.

William McBride, Medtronic Embarks on Self-help Tax Reform (Tax Policy Blog).  “The high U.S. corporate tax rate is causing serious economic distortions, chasing away businesses, investment and jobs. The only way to deal with it effectively is to bring the corporate tax rate down to competitive levels, which is the path chosen by virtually every other country.”

 

Renu Zaretsky,  Tax Freedom, Tax Avoidance.  The TaxVox headline roundup covers the Medtronic inversion and internet taxes.

TaxProf, The IRS Scandal, Day 404

Kay Bell, IRS says possible Tea Party emails lost in computer crash. “Conspiracy or clowns?”

 

News from the Profession.  Here’s Your Authoritative Guide for Likening Game of Thrones to Public Accounting (Going Concern)

 

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Tax Roundup, 6/16/14: The dog ate my email edition. And: mail those estimates!

Monday, June 16th, 2014 by Joe Kristan

Mail your second quarter 1040 and 1041 estimates today! (Or pay them online).

 

Rose Mary Woods checks her e-mail in the Nixon administration.

Rose Mary Woods checks her e-mail in the Nixon administration.

If the IRS demanded your emails, and you said the computer “crashed” and ate them, they’d buy that, right?  

The IRS expects us to believe that they so monumentally incompetent at information technology that they can’t produce Lois Lerner’s emails from January 2009 through April 2011.  No backups?  No RAID duplication?  No way to reconstruct them out of the bad hard drive?

Even the best possible interpretation of this — taking the IRS at its word — is a damning indictment of the agency.  It would show that basic network hygiene used by the private sector since the last century still is too advanced for the biggest taxing agency in the world.

But you may be excused for suspecting evil instead of incompetence here.  Congressional investigators have been looking for these emails for months.  Evidence has been building of an interagency effort between the IRS and the Justice Department to shut down, and even prosecute, unfriendly organizations.  Now, suddenly, poof, no more emails.  I don’t buy it.

The IRS statement says “In the course of collecting and producing Ms. Lerner’s additional emails, the IRS determined her hard drive crashed in 2011.”  What email system does the IRS use where the emails live on individual hard drives, rather than an email server?  Do any of you readers use your PC as your email server?  If so, do you never back it up?

And if you buy the IRS story, then tell my why on earth this exceptionally inept agency should be responsible for administering the nation’s health insurance system through the ACA.  Or even the income tax, for that matter.

Sheryl Attkinson has some follow-up questions for the IRS:

Please provide a timeline of the crash and documentation covering when it was first discovered and by whom; when, how and by whom it was learned that materials were lost; the official documentation reporting the crash and federal data loss; documentation reflecting all attempts to recover the materials; and the remediation records documenting the fix. This material should include the names of all officials and technicians involved, as well as all internal communications about the matter.

Please provide all documents and emails that refer to the crash from the time that it happened through the IRS’ disclosure to Congress Friday that it had occurred.

Please provide the documents that show the computer crash and lost data were appropriately reported to the required entities including any contractor servicing the IRS. If the incident was not reported, please explain why.

Please provide a list summarizing what other data was irretrievably lost in the computer crash. If the loss involved any personal data, was the loss disclosed to those impacted? If not, why?

Please provide documentation reflecting any security analyses done to assess the impact of the crash and lost materials. If such analyses were not performed, why not?

Please provide documentation showing the steps taken to recover the material, and the names of all technicians who attempted the recovery.

Please explain why redundancies required for federal systems were either not used or were not effective in restoring the lost materials, and provide documentation showing how this shortfall has been remediated.

Please provide any documents reflecting an investigation into how the crash resulted in the irretrievable loss of federal data and what factors were found to be responsible for the existence of this situation.

For a phony scandal, it’s amazing how real they’re making it look.

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

Other Coverage:

Russ Fox, The Two Year Gap. “Either the IRS is deliberately lying or they have the worst IT department and policies of any company, organization, or government entity in the world.”

Ron Fournier, Did The IRS Really Lose Lois Lerner’s Emails? Let a Special Prosecutor Find Them.  “The announcement came late Friday, a too-cute-by-half cliche of a PR strategy to mitigate backlash. ‘The IRS told Congress it cannot locate many of Lois Lerner’s emails prior to 2011 because her computer crashed during the summer of that year,’  The Associated Press reported.

Althouse, “Did The IRS Really Lose Lois Lerner’s Emails? Let a Special Prosecutor Find Them.”  “Give us a special prosecutor, because it’s not acceptable to tell us we’re supposed to believe this story of disappearing evidence….”

The Blaze, Veteran IT Professional Gives Six Reasons Why the IRS’ Claim That It ‘Lost’ Two Years of Lois Lerner’s Emails Is ‘Simply Not Feasible’

TaxProf, The IRS Scandal, Day 403, rounding up blog and big-media coverage.

Peter Reilly, Personal Goodwill Avoids Corporate Tax Exposure:

The IRS does not like the concept of “personal goodwill”, but courts have often approved it.  In the Tax Court decision in the case of Bross Trucking, the concept was confirmed again, helping to save the taxpayer from what appears to me to be a real overreach on the part of the IRS. 

An interesting case involving a group of family businesses.

 

Younkers ruins 20140610Robert D. Flach, FINE WHINE: WHY MUST WE PUT UP WITH LATE ARRIVING CORRECTED 1099-DIVs EACH TAX SEASON?

Kay Bell, A Father’s Day gift for single dads: 5 tax breaks

Jack Townsend, 11th Circuit Holds Clear and Convincing Evidence Required for Section 6701 Penalty; Can Reasoning be Extended to FBAR Willful Penalty?

Phil Hodgen, Maximum account value determination for trust beneficiaries for FinCen Form 114.   Useful information ahead of the June 30 FBAR deadline.

Andy Grewal, TEFRA Jurisdiction and Sham Partnerships — Again? (Procedurally Taxing).  A guest post by a University of Iowa law prof.

 

Howard Gleckman, The Strange Fruit of the House’s Bonus Depreciation Bill (TaxVox).  “If I had read the bill more carefully, I would have noticed that while it applied to fruit that grows on trees and vines, it inexplicably excluded fruit that grows on bushes. As a blueberry lover, I am shocked and outraged.”

TaxGrrrl, House Votes To Make Small Business Tax Break Permanent.  “The bill would make the [$500,000] cap retroactive to January 1, 2014.”

Scott Drenkard, Donald Sterling Might Not Be Able to Write Off $2.5 Million Fine as a Business Expense (Tax Policy Blog).

Going Concern, What’s a Day in the Life of a Typical Audit Intern?  You’ve been dying to know!

 

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Tax Roundup, 6/11/14: IRS Bill of Rights: just words? And: when your state got its income tax.

Wednesday, June 11th, 2014 by Joe Kristan

billofrightsTalk is cheap.  The North Korean constitution has a whole bunch of rights,  per Wikisource.  For example:

Article 70. Citizens have the right to work. All able-bodied citizens choose occupations in accordance with their wishes and skills and are provided with stable jobs and working conditions. Citizens work according to their abilities and are paid in accordance with the quantity and quality of their work.

Article 75. Citizens have freedom of residence and travel.

Article 78. Marriage and the family shall be protected by the State. The State pays great attention to consolidating the family, the basic unit of social life.

 

So written declaration of rights are just empty words when there is nothing behind them. That’s why I can’t get too excited about the big Taxpayer Bill of Rights announced by IRS Commissioner Koskinen and Taxpayer Advocate Olson yesterday.

Nothing to disagree with on the list, but what will the IRS do to make it more than empty words?  Going down the list:

The Right to Be Informed.  The IRS is infamously secretive.  Will they no longer require Tax Analysts to sue them to make public their positions and procedures?  Will the required compensation for S corproation employee- shareholders be only known to the whim of the examining agent?

The Right to Quality Service.  The IRS continues to get worse at answering taxpayer questions.  It seems like they are worse than ever at dealing with correspondence.  It has become nearly impossible to reach IRS personnel in D.C. by phone to ask technical questions. Is the Commissioner going to change any of this?

The Right to Pay No More than the Correct Amount of Tax.  The nearly-automatic assertion of penalties for every asserted deficiency will have to end for this to mean anything.

The Right to Challenge the IRS’s Position and Be Heard.  The consolidation of appeals offices and their seeming loss of independence will have to be reversed for this to mean something.

The Right to Appeal an IRS Decision in an Independent Forum.  See you in Tax Court…

The Right to Finality.  Does this mean IRS will enable offshore FBAR foot-faulters to come into compliance without facing financial ruin?

The Right to Privacy and The Right to Confidentiality. These are a big ones, and the IRS hasn’t been doing so well at them lately.

The Right to Retain Representation.  Yet the IRS wants to choose who gets to do this for you. When the IRS can shut down your representative, he may not be a really zealous advocate.

The Right to a Fair and Just Tax System.  This is something that the IRS can’t ultimately reach on its own — Congress designs the system — but it could sure do a lot better.  When the IRS routinely assesses $10,000 penalties for filing Form 5271 one day late, when they effectively loot foreign pension accounts of expats for inconsequential paperwork violations, it’s hard to see the fairness and justice.

Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Other coverage:

TaxProf has a roundup.

Kay Bell, Would the newly adopted Taxpayer Bill of Rights have prevented the IRS Tea Party scandal?

Robert W. Wood, IRS Reveals Taxpayer Bill Of Rights

Joseph Henchman, IRS Approves List of Taxpayer Rights (Tax Policy Blog).  “My own addition is that much as requiring police to know and inform arrestees of “Miranda” warnings has increased awareness of those rights, so too will this.”

TaxGrrrl,  IRS Releases Much Anticipated ‘Taxpayer Bill Of Rights’  “With the wrap up of filing season, the IRS is now in its peak correspondence mailing season. This was, according to Koskinen and Olson, the perfect time to introduce the rights since they will be mailed out together with those correspondences.”

Russ Fox, IRS Adopts “Taxpayer Bill of Rights;” Will Anything Change?  “Until the IRS comes clean on the IRS scandal, what was released today makes a great sound bite but is otherwise nothing new. The IRS appears to have violated six of the ten rights, and is still stonewalling Congress on the scandal. The IRS’s budget won’t be increased because of today’s press release.”

 

Scott Drenkard, Richard Borean, When Did Your State Adopt Its Income Tax? (Tax Policy Blog):

20140611-1

No, they haven’t been around forever, it just feels that way.  Wisconsin was first.

 

Jason Dinesen, Same-Sex Marriage and Amending Prior-Year Returns.  “A broader way of asking the question is: if someone who’s in a same-sex marriage amends a prior-year return that they had previously filed as a single person due to the Defense of Marriage Act, must that amended return show a filing status of married?”

Tony Nitti, District Court: Lone Sale Of Undeveloped Land Generates Ordinary Income, Jeopardizing Land Banking Transactions   

William Perez, Home Office Deduction

Keith Fogg, Government Drops Appeal in Rand Case (Procedurally Taxing).  This is the case where the Tax Court ruled that a recovery of refundable credits in excess of income tax was not a “deficiency” for computing penalties.

Jack Townsend, Reminder: Category 2 Banks Will Serve Up Their U.S. Depositors .  Consider banking secrecy dead.

Brian Strahle provides a list of state and local tax blog resources. 

 

20140611-2Alan Cole, Japan’s Tax Reforms and its Blockbuster GDP Growth (Tax Policy Blog):

Paired together, theory would predict that these two tax changes create a structural shift in the Japanese economy; the more favorable corporate tax climate would encourage investment, and some income would be spent on that new investment instead of immediate consumption. Over the long term, this will boost Japanese wealth and productivity, and eventually allow for a higher standard of living than before.

The data fit this theory so far; private nonresidential investment grew at a “blockbuster” rate of 7.6% in the first quarter of 2014. 

 

David Brunori, A Coke and a Smile and a Tax (Tax Analysts Blog). ” It would tax a can of Coke, but if you went to Starbucks and dumped five teaspoons of sugar into your latte, there would be no additional tax.”

TaxProf, The IRS Scandal, Day 398

Going Concern, Ex-BDO Vice Chairman Given 16 Months to Think About His Choices. He will retire to a Bureau of Prisons meditation facility.

He was ashen after the sentence was announced.  Gray man sentenced to 18 months for tax evasion

 

 

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Tax Roundup, 6/10/14: When doing a like-kind exchange, keep the kids away. And: Iowa biofuel credit claw-backs?

Tuesday, June 10th, 2014 by Joe Kristan

20120511-2Keep your friends close, and your relatives far away.  The tax law often assumes that any financial transaction between relatives is untrustworthy.  Many transactions that work just fine with a stranger become tax disasters when family is involved.  A New York man got a hard education in this yesterday in Tax Court.

The man was selling property at a $1.5 million gain, and he wanted to use the Section 1031 “like-kind exchange” rules to defer the gain by using the proceeds to acquire new property.  The tax regulations let you do so under the right facts as long as you follow rules on escrowing funds or using a “qualified intermediary,” and you meet deadlines for identifying and closing on the new “replacement property.”

For example (a very simplified example), if you sell an investment property and the proceeds are held by a “qualified intermediary,” and you identify the property within 30 days and close on it within 180 days, using the funds held by the intermediary in the purchase, the gain on the original property is transferred to the new property, to be only recognized if and when that property is sold.  But the IRS insists you go by the book.

These deals only work if you use a “qualified” intermediary.  The taxpayer in this case used his son.  Game over, said the Tax Court:

Petitioner acknowledges that there was no direct exchange of like-kind property; property A was sold and property B was purchased with proceeds from the sale of property A. Petitioner also acknowledges that the intermediary used in the transaction was his son. However, petitioner asserts that he meets the requirements of the regulation’s safe harbor because (1) his son is an attorney; (2) the funds from property A were held in an attorney trust account; and (3) the real estate documents refer to the transaction as a section 1031 exchange. We do not accept petitioner’s argument. The regulation is explicit: A lineal descendant is a disqualified person, and the regulation makes no exception based on his/her profession. Consequently, petitioner’s disposition of property A and subsequent acquisition of property B is not a deferred exchange within the purview of section 1031, and he must recognize income on the gain from the sale of property A.

There are a number of reputable firms that specialize in serving as intermediaries and escrow agents in like-kind exchanges.   They can make a potentially complicated deal go much more smoothly.  And they are probably not your son. Yes, they charge for their services, but when a $1,512,000 taxable gain is at stake, as it was here, it can be a real bargain.

Cite: Blangiardo, T.C. Memo 2014-110.

 

In other legal news, the Supreme Court declined to hear Wells-Fargo’s appeal of a 2013 decision striking down a lease tax shelter designed to generate a $423 million capital loss.

 

20120906-1Iowa wants some tax credits back.  Agweek reports:

 The Iowa Department of Revenue has warned at least one investor who owns shares in Energae LP of Clear Lake, Iowa, that tax credits for the company’s green energy production couldn’t be verified for 2012, and the credits must be paid back.

In a letter dated May 20, 2014, David Keenan, a revenue examiner for the compliance division of the Iowa Department of Revenue, told an unidentified taxpayer from Iowa to pay back $1,131.73. Victoria Daniels, public information officer for the agency, declined to comment on what might have disqualified the credits, or whether the denial affects only 2012. She also declined to comment on whether the department’s decision was focused on just one audited person or whether it will be extended to others who used the credits.

The Department has clawed back credits in cases where ethanol producers have failed or otherwise not met the requirements for the credits.

The article shows that the state subsidies encourage careless investing.  An attorney in a lawsuit on the matter is quoted:

“They offered a dollar-for-dollar tax credit, so people thought, ‘How can you lose?’ They may find out. I hope things come to a head soon because it seems to me there’s a lot of confusion and misinformation in the investing public. I think there needs to be some clarity.”

While this is only one side of the story, it’s easy to see where an investor might overlook due diligence when a “dollar-for-dollar tax credit” makes the deal seem like a free play.

 

The Onion is a satirical publication, but it’s hard to tell sometimes:   States Now Offering Millions In Tax Breaks To Any Person Who Says ‘High-Tech Jobs’

ST. PAUL, MN—In an effort to spur their local economies, many state governments are now offering tens of millions of dollars in tax breaks to any person who simply says the words “high-tech jobs,” according to a survey by the Pew Research Center published Monday. “We must do what it takes to draw potential innovators to the great state of Minnesota, which means granting lucrative tax credits and loan guarantees to any individual—whoever they may be—who utters the phrase ‘high-tech jobs’ in any context whatsoever,” said Minnesota governor Mark Dayton, whose office has reportedly joined numerous other states in doling out tax exclusions, low-interest municipal loans, full income tax exemption for 10 years or more, and other valuable incentives to thousands of people who have spoken such phrases as “biotech,” “innovation center,” “high-skilled workers,” and “tomorrow’s economy.”

If the story were written about Iowa, the magic words would include “renewables,” “wind-energy,” and “fertilizer.”

 

Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

TaxProf, The IRS Scandal, Day 397.  The stories today mostly cover a huge illegal transfer of confidential 501(c)(4) taxpayer data to the FBI.  The House committee investigating the Tea Party scandal revealed  communications between Lois Lerner and FBI representatives arranging the illegal transfer.  This is a big deal, making it clear that the activities involving Ms. Lerner weren’t accidental, and were far more sinister than the “phony scandal” crowd would have you believe.

Russ Fox, Perhaps This Is Why Lois Lerner Is Taking the Fifth.  “Based on what I just read, if anyone is expecting the IRS’s budget to increase this year, well, that has as much chance as it snowing here in Las Vegas tomorrow. (The high is expected to reach just 105 F.)”

Leslie Book, Exploding Packages and IRS Disclosure of Confidential Tax Return Information (Procedurally Taxing)

 

Robert D. Flach brings your fresh Tuesday Buzz!

Kay Bell, Lowest U.S. property tax bill? Probably $2 in coastal Georgia

 

Jack Townsend, Court Holds Online Poker Accounts are FBAR Reportable:

The two issues were:  (1) whether the accounts with the three entities were “bank, securities or other financial account[s]” that must be reported on an FBAR; and (2) whether each of the three accounts was in a foreign country  The Court answered both questions yes.

A potentially expensive result for a lot of folks, if it holds up.

 

Gerald Prante, Deductions for Executive Pay Is Not a Subsidy. (Tax Policy Blog)  “Essentially, IPS and ATF are starting from a baseline that assumes all executive pay should be capped at $1 million and any deviation from this is a subsidy.”

 

taxanalystslogoJeremy Scott, Whistleblower Highlights Undue Influence at the IRS (Tax Analysts Blog)  “He claimed that granting credits for the use of black liquor was opposed by most of chief counsel, but that a few senior managers changed the policy, allowing paper manufacturers to take advantage of a true tax loophole.”

But we are supposed to trust them to regulate preparers without fear or favor.

 

Tax Justice Blog, State News Quick Hits: Keeping Score? Real Tax Reform 0. Tax Cuts 2

Martin A. Sullivan, How Not to Tax the Rich (Tax Analysts Blog).  “The liberal case for corporate taxation has been severely weakened by capital mobility.”

Renu Zaretsky, Repatriation, Havens, and Tax Reform Abroad.  The TaxVox daily headline roundup talks about extenders, tax havens and the costs of repatriation tax holidays.

 

Peter Reilly, Confidence Games – How The Most Prestigious Accounting Firms Raided The Treasury: 

 Now thanks to Tanina Rostain and Milton C. Regan, Jr. you can read all about it in “Confidence Games – Lawyers, Accountants, and the Tax Shelter Industry”. It is a sad story with no heroes and only one villain, who is colorful enough to be engaging – Paul Dauugerdas, who is still awaiting sentencing on his second conviction (He got a do-over on his trial due to juror misconduct).  The book is a must read for all tax professionals and others may enjoy it too.  

Sounds like a buy to me.

 

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Tax Roundup, 6/9/14: The great Illinois privatized tax shakedown. And lots more!

Monday, June 9th, 2014 by Joe Kristan

The wedding was beautiful, and great fun.  Introducing the new married couple.

 

Illinois sealGreat moments in state taxation.  Tax Analysts has a disturbing story ($link) about how an Illinois law firm is using the “qui tam” recovery procedures of the state’s False Claims Act against out-of-state taxpayers.  In a “qui tam” proceeding, an outside party, known as a “relator,” can file a lawsuit alleging fraud against the state and then share in the recovery — up to 25%, according to the story.

And they actually may be hurting state tax collection efforts, according to the story:

“The cases have clearly interfered with the administration and enforcement of tax law and may have even ultimately cost the state money, though it’s impossible to quantify how much,” said Mark Dyckman, the Illinois Department of Revenue’s deputy general counsel for sales tax litigation.

The story says the firm involved “is responsible for 99 percent of the qui tam tax litigation in Illinois.”

The story says Illinois may encouraged the suits initially, apparently thinking it could get some easy money out of the deal.  In other states where the firm tried the same thing, state Attorneys General won dismissals of the initial suits, discouraging further efforts.  The firm is also incentivized by the ability of a relator to share in outsized false claim penalties:

Second, while the treble damages for back taxes under false claims acts naturally attract the most attention, [taxpayer attorney Jordan] Goodman said the civil penalty — generally $5,000 to $10,000 per false claim under the federal law and $5,500 to $11,000 per false claim under the Illinois statute — can be just as oppressive, depending on what counts as a false claim. If each monthly sales tax return is a false claim carrying a $10,000 penalty, and 12 returns are filed in one year, that’s a $120,000 penalty. If every failure to collect taxes on shipping and handling is a false claim, and the business averages 10 sales into the state per month for 120 false claims, that’s a $1.2 million penalty for the year, which can turn into $12 million for the 10-year period covered by the false claims act.

Wikipedia image of Tams

Wikipedia image of Tams

The story says that one tactic used by the Illinois law firm is to make out-of-state purchases over the internet, and then to file suits if no sales tax is collected.  As the law covering remote sales remains unclear, it’s difficult to consider these items “false claims.”  That’s especially true in suits in which the taxpayer either was following published guidance or an audit settlement with Illinois.

These cases have apparently been going on since 2002, and the legislature and the state have yet to stop what would appear to be a purely abusive and parasitic practice.  If there ever was a case for universal application of a “sauce for the gander” rule, in which a losing plaintiff had to pay the same amount of penalties asserted against the winning defendant, this would be it.

 

Alligator bait.  The New Orleans Advocate reports on a Film tax credit promoter sentenced to 70 months.  It’s remarkable what high quality entrepreneurs these state tax giveaways attract.

 

20130114-1The ISU Center for Agricultural Law and Education is setting up a “Tax Place” feature on its website.  They seek your input.

Paul Neiffer reminds us that FBAR Filing Deadline is Near

Peter Reilly, CPA Faces Prison For Letting Client Deduct Personal Expenses.  It makes you want to carefully consider the work you want to take on.

Russ Fox, Back to the Past: Poker Sites and FBARs. Poker Sites Are Again Reportable Foreign Financial Accounts.  More incomprehensible foreign tax enforcement.

 

Cara Griffith, Protecting Confidentiality When Information Is Exchanged Between Tax Authorities  (Tax Analysts Blog)

TaxGrrrl, As NBA Finals Continue, Tax Incentives Lure 76ers Into New Jersey   

 

 

20140321-3TaxProf, The IRS Scandal, Day 396

Kyle Pomerleau, CTJ and U.S. PIRG Mislead with New Report on Corporate Taxes (Tax Policy Blog):  “USPIRG also doesn’t mention that their ideal corporate tax code has been tried in other countries with negative results. New Zealand attempted ending deferral as USPIRG suggested. The results were devastating to their economy.

Tax Justice Blog, Tax Foundation’s Dubious Attempt to Debunk Widely Known Truths about Corporate Tax Avoidance Is Smoke and Mirrors.  Never let the facts get in the way of what is “widely known.”

 

Howard Gleckman, Are Domestic Partnerships A Way For Heterosexual Couples To Avoid The Marriage Tax Penalty?   (TaxVox) This sort of thing makes makes me question the usefulness of “nudge” strategies to use the tax code to encourage behavior.  There are always perverse unintended consequences.

 

News from the Profession.  Public Accounting Firms, Ranked by CEO Hotness (Going Concern).  A tallest midget competition.

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Tax Roundup, 6/2/14: Tax moralism and moral panics. And: IRS, abetter of theives, scourge of victims!

Monday, June 2nd, 2014 by Joe Kristan

taxanalystslogoTax Analysts’ Tax Notes and State Tax Notes are part of my healthy breakfast, and today they are especially delicious.  The only bad part, for me, is that they are subscription publications, making them hard to share in full.  I can give you morsels, though.

Joseph Thorndike has an excellent discussion of the hollow moralism of tax debates, though he ends up defending it.  In the course of discussing an article by Allison Christians on the role of moralism in tax debates, he comes up with gem after gem.  He quotes Learned Hand’s discussion of the issue, which I find conclusive:

Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.

That never stops politicians, as Joseph points out:

     More recently, President Obama’s proposal for a “Buffett rule” clearly falls within that tradition of tax moralism (although in this version of the morality play, the billionaire plays the hero rather than the villain). Like the AMT, the Buffett rule is a rear-guard action to defend the fisc against the predations of aggressive avoiders.

But those sorts of Rube Goldberg tax contraptions are an admission of failure. They take for granted that the existing tax base and its statutory rate structure cannot be defended. But the efficacy of those second-best tax systems — at least when measured in terms of fairness — is anything but self-evident. And their costs in terms of complexity and opacity are substantial. 

If you move away from the law, to a system of “morality” in paying taxes, you lose your way.  Who decides what is moral?  Politicians?  Don’t make me laugh.  It’s hard enough to follow the law, given its ridiculous complexity.  If you then require taxpayers to meet subjective standards of whatever pressure group feels like calling a press conference that day, you make taxes pretty much impossible.

One point not mentioned is the conflicting moral obligations of taxpayers.  A rich individual has moral responsibilities to his children, his business and his own community.  The IRS can’t be the supreme moral agent.  And a corporation has moral and legal obligations to its shareholders, customers and employees that conflict with any “moral” obligation to the fisc.  Given that pensions are mostly invested in corporation stock and bonds, their “moral” obligation to give politicians more money for buying votes is hard to take seriously.

 

e-cigFor dessert, David Brunori chimes in on e-cigarettes and politicians

 I get the rationale for tobacco taxes. You smoke, you get sick, society has to pay for your medical care. That’s consistent with the classic rationale for excise taxes. Those taxes are legitimate only if used to pay for externalities — that is, the societal costs that aren’t borne by the market.

Of course, cigarette taxes in particular have never really been about externalities. If they were, every penny of revenue would go to smoking-related healthcare. Instead, dozens of states earmark some cigarette tax revenue for education (I still can’t believe teachers who rely on cigarette tax revenue for their raises aren’t leaving cartons of Lucky Strikes on their kids’ desks). 

Ah, but giving away cartons of cigarettes on a teacher’s salary?  Of course, my mom was a teacher, and I remember as a kid buying her cigarettes at the store.  But she never shared them, and I never picked up the habit.

David adds:

Taxing e-cigarettes is a money grab. If people use e-cigarettes instead of real cigarettes, the state loses money. The vested interests like the public employee unions and the myriad government contractors can’t have that. But proponents won’t admit the money-grabbing motive.

Iowa, like many other states, is a partner in the tobacco industry as a result of a shakedown settlement agreement with the big tobacco companies.  The industry continues to operate, with the politicians getting a cut of the revenue (nice vice racket you got there, hate to see something bad happen to it).  The moral panic over e-cigarettes is really about protecting this franchise.

 

20130419-1We’ll let them steal your money, and then we’ll punish you for it.  IRS freezes tax ID theft victims’ return – then hits them with late penalties. (Cleveland.com)

Pat Pekarek and her husband, Roger, discovered someone filed taxes using Roger’s Social Security number last year, after the IRS rejected their e-filed joint return.

The Pekareks, who live in Parma Heights, dutifully followed the IRS’ instructions to send their return by mail with documentation proving they were the real Pekareks. The IRS immediately froze their account, along with a credit that Pat Pekarek expected to use toward this year’s taxes.

A year later, the account remains in the IRS deep freeze – along with the credit. And now, even though it was the IRS freeze that kept the credit on ice, the agency is demanding the Pekareks cough up back taxes and pay late penalties.

The IRS has let identity theft get completely out of control, while spending its time and energy trying to regulate law-abiding preparers and harassing uncongenial political groups.  And they’ve managed to neglect and abuse the victims while doing so.  Good thing they are responsible for our health insurance system too.

 

William Perez, Foreign Bank Accounts due June 30th.  New form, and now you have to e-file.

TaxGrrrl, Las Vegas Man Cheated IRS, Taxpayers Using False Home Buyer Credits:  “Refundable credits are traditionally a magnet for fraudulent claims and this one was no different: initial reports indicated that nearly 100,000 refunds were perhaps inappropriately distributed, with $600 million of taxpayer credits labelled “suspicious” in 2009 (despite those numbers, Congress kept extending the credit).”

Jack Townsend, Accountant Sentenced For Tax Crimes; Conduct Included FBAR violations .  “The gravamen of Duban’s conduct is that he assisted the persons related to the automobile dealership in running nondeductible personal expenses through the corporation.”

Scott Schumacher, Winning the He-Said-She-Said Case (Procedurally Taxing)

Tony Nitti, S Corporation Shareholder Must Reduce Basis For Non-Deductible Corporate Loss 

 

20140401-1Lyman Stone, Response to Politico: Taxes and the Texas Miracle (Tax Policy Blog):

But long-term tax policies do matter. Stable, neutral, non-distortionary tax policies, offering low tax rates on broad tax bases, can support economic growth. Firm site selection is one channel, through which taxes affect economic decisions on the margin. There is robust evidence that taxes (while certainly not the only or even the largest factor) do matter for site selection. And, as one of the few site selection variables policymakers can directly control, it makes sense for them to be concerned about the role of taxes.

But not in the form of paying people to be your friends via tax credits.

 

Annette Nellen, Is tax reform on or off? Odd activities in the House last week

Kay Bell, Debate continues about tax havens and punishment fairness

 

Renu Zaretsky, Holes, Holidays, Hurricanes, and Tax Bills (TaxVox).  “The Illinois legislature passed a budget with revenue holes and no spending cuts.”

 

TaxProf, The IRS Scandal, Day 388

Me, 2 million served.  An arbitrary milestone, achieved!

 

Russ Fox, No, Fido & Lulu Can’t Own Your Business:

All corporations have to have a Board of Directors. That board handles various business items of the corporation. Now, in a tightly controlled corporation you might just have one board member–yourself. But Mr. Zuckerman elected a strategy that I haven’t seen before (and I doubt I’ll see again): He named his pets as board members.

They were probably as independent as any number of human board members.

 

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Tax Roundup, 5/29/14: Supreme Court ponders crediting city income taxes on state returns. And: more jeers for “voluntary” preparer regulation.

Thursday, May 29th, 2014 by Joe Kristan

supreme courtThe U.S. Supreme Court will decide a case on whether states must allow a credit for taxes paid to municipalities.  The Supreme Court yesterday agreed to hear an appeal of Maryland v. Wynne, where a Maryland court ruled that the state must allow a credit against Maryland taxes for taxes paid in non-Maryland cities by Maryland residents.

State generally allow their residents credits for taxes paid to other states, to the extent the taxes don’t exceed resident-state tax on the same income.  Iowans compute this credit on Form 130.  This keeps residents with out-of-state income from doubling-up their state taxes.  Municipal taxes don’t necessarily get the same treatment.  An Iowa Department of Revenue representative outlined the state’s position:

Iowa Code section 422.8(1), which provides for the out-of-state tax credit, only refers to tax paid to another state or foreign country.  “State” is defined in Iowa Code section 4.1(32) as including the District of Columbia and its territories.  Therefore, based on the Iowa statute, Iowa would take the position that the out-of-state tax credit is not allowed for municipal taxes.

I have no idea how the court will rule on this.  Both Maryland and the Obama administration urged the court to take the case, which might indicate the court is sympathetic to them.  Or it might not.  For its own reasons, the Court may be looking for a vehicle to clarify the law of multistate income tax.

A brief from an organization of municipality attorneys describes the Maryland holding being appealed:

1. First, in order to avoid substantial interference in interstate commerce, the dormant Commerce Clause of the United States Constitution requires every state and subdivision thereof to give its residents a full tax credit for all income taxes paid in another state or subdivision; and

2. Second, the receipt of Subchapter S pass-through income in Maryland is “interstate commerce” which is being substantially affected by Maryland’s tax structure, in violation of the dormant Commerce Clause.

Both of those points seem perfectly reasonable to me.  If the court rules against the taxpayer, states may try to raise money be limiting their credit for taxes paid to other states.

In any case, it would be prudent for Iowans who have paid taxes to non-Iowa municipalities to file protective refund claims for open years.  For taxpayers who extended 2010 returns, that year is still open; otherwise, 2011 is the earliest open year.  The court will hear the case in its term beginning in October.

The TaxProf has a coverage roundup.  TaxGrrrl reports in Supreme Court Agrees To Hear Landmark Case On Whether States May Tax Income Earned In Other States, with a good discussion of the history of the case.

 

20130121-2Another supporter of preparer regulation comes out against “voluntary” certification.  The American Institute of Certified Public Accountants came out against the IRS “voluntary” preparer certification system this week.  Now the National Association of Enrolled Agents, which like the AICPA was a fan of the now-defunct IRS mandatory preparer regulation scheme, has also come out against the “voluntary” program proposed by Commissioner Koskinen.  Robert D. Flach reports:

It appears that the main objection of NAEA to the current IRS proposal is the replacement of the original initial competency test used in the pre-Loving mandatory RTRP program with a “50-question ‘knowledge based comprehension test’ to be created by individual CE providers”.

It goes on to say -

“CE by itself, even in combination with a ‘knowledge based comprehension test’, fails to provide a taxpayer with any assurance that the person preparing his or her return is even minimally competent to do so.”

I think this is just another way for the IRS to help its friends at the national tax prep franchises to get something to put on their windows without helping taxpayers.  Considering its limited financial resources, it is absurd for the IRS to be taking on a new program.  Taxpayers can already choose CPAs or Enrolled Agents if they want “certified” preparers, and nothing stops unenrolled preparers from setting up their own system.  You have to have a lot of unwarranted faith in IRS goodwill to believe that the “voluntary” program won’t really be mandatory, as the IRS gives little perks to the “volunteers” and little hassles to everyone else.

 

 

Kay Bell, Actual auto expenses or standard mileage rate? Which business deduction method will cut your taxes more?

William Perez, IRS.gov’s Direct Pay.  “Unlike the Electronic Federal Tax Payment System (EFTPS), people using Direct Pay do not need to register to use the service.”

 

20140328-1Russ Fox, Punt Blocked; National Audit Defense Network Heading to ClubFed.

Cara Griffith, How Much Knowledge Is in an Audit Manual? (Tax Analysts Blog).  “Yet while the IRS and several states make their audit manuals available online, other states, including Louisiana, do not. Taxpayers should not have to make a public records request to obtain manuals that will provide guidance on how a state conducts an audit. ”

Leslie Book, TEFRA Outside Basis and Tax Court Jurisdiction (Procedurally Taxing). “Periodically, like a kid forced to eat spinach, I will tackle TEFRA developments.”

Peter Reilly, Z Street Suit On IRS Israel Targeting Can Move Forward. “This lawsuit much like Teapartygate confirms me in my view, that the evaluation of whether an organizations purposes should allow it exempt status is not something that the IRS should be doing.”

Jack Townsend, Zwerner Jury Verdict — FBAR Willfulness for 3 Years

TaxProf, The IRS Scandal, Day 385

 

guillotineAndrew Lundeen, France’s 75 Percent Tax Rate Offers a Lesson in Revenue Estimating (Tax Policy Blog):

Since elected, French President Francois Hollande has raised the income tax, corporate tax and VAT. The government forecasted that these tax increases would lead to an increase in revenue of 30 billion euros.

As reported by the BBC, those estimates were off by about half:

“The French government faces a 14bn-euro black hole in its public finances after overestimating tax income for the last financial year.”

You can’t expect people just to stand still for something like that.

 

Adele Morris, Three Options for Better Climate Policy (TaxVox) Carbon Taxes, State carbon taxes, or no carbon tax.

 

Going Concern, IRS Throws Hissy Fit About Not Being Able to Regulate Preparers, Gives Up On Everything.

 

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Tax Roundup, 5/27/14: IRS not so severe on e-file identification? And driving the extra mile to save on taxes.

Tuesday, May 27th, 2014 by Joe Kristan

e-file logoThe IRS may end up less ridiculous than they appear to be in writing.  We mentioned last week the new IRS Publication 1345 rules for e-file tax firms that by their terms appear to require practitioners to card their in-office clients and run credit checks on clients who mail or upload their tax information.  Our local “stakeholder liaison (the IRS representative who works with practitioners) called me and said she has been told by higher-ups that the requirements will be less severe than they look.  She also called Jason Dinesen, who reports:

This IRS this afternoon confirmed to me and other practitioners who had been making the IRS’s lives miserable the last few days that: the new e-file rules apply only to electronically signed e-file authorizations. And “electronically signed” means signed by some means other than pen-to-paper.

I hope this is true, but I will feel better when the IRS puts it in writing.  After all, you aren’t protected form penalties by oral advice.  But even if it is true, it seems even sillier than the original rule.  The whole idea is to prevent identity theft, but it’s a rare ID thief who hires a practitioner to steal identities.  It would be rarer still for one to go through the trouble of using an e-signature return.  That’s why I’m not fully convinced by the liaison; it just would create a requirement so onerous for a narrow set of returns that few people will file that way.

Related: Tax Roundup, 5/21/14: Practitioner Pitchforks and Torches edition. And: math remains hard!

 

20140527-1TaxGrrrl, On Memorial Day, A Look At Surviving Family Military Benefits   

If you’re a serious poker player, you might want to check out Staking and the 2014 WSOP: Nothing Has Changed.

TaxProf, The IRS Scandal, Day 383

Lyman Stone, New State-Level Price Data Shows Smaller State Real Income Differences (Tax POlicy Blog):

Federal tax progressivity has strange consequences. People who are “poor” in one state could be “rich” in another without changing the dollar amount of their income. So the progressive nature of the federal income tax can lead to poor- or middle-class people in high-price states paying taxes equivalent to what significantly richer (in real, standard-of-living terms) people would pay in low-price states.

It costs more to be rich in New York than Des Moines.

 

Renu Zaretsky, The ACA, Extenders, and More Swiss Banks.  The TaxVox headline roundup includes a link to a NY Times piece on a recent IRS ruling to prevent “dumping” of employees on state exchanges through tax-free reimbursement plans. Just one more hasty patch on a leaky system.

Robert D. Flach comes back from a long weekend with your Tuesday Buzz!

News from the Profession. California Board of Accountancy Says the Early Bird Gets the CPA Exam Worm (Going Concern)

 

20140527-2Going the extra mile to save on taxes.  An Alaska doctor should get points for endurance, anyway, even if it turns out that he is a tax cheat.  The Justice Department accuses Michael Brandner, an Anchorage doctor, of evading taxes through offshore accounts.  According to the Department press release, the physician literally was operating under-the-radar (my emphasis):

According to court documents, Brandner engaged in a scheme to hide and conceal millions of dollars of assets from the Alaska courts and from his wife of 28 years who was divorcing him.  Shortly after the divorce was filed, Brandner left Alaska and drove to Central America after converting assets into five cashier’s checks worth over $3,000,000.

Driving from Alaska to Panama isn’t for the faint-hearted.  Driving their with $3 million in cashiers checks — that’s impressive, in a crazy sort of way.  If he is convicted, his sentence should include time served on the road.

 

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Tax Roundup, 5/22/14: IRS teams up with Bernie Madoff. And: more on the new e-file ID rules.

Thursday, May 22nd, 2014 by Joe Kristan
Bernie Madoff

Bernie Madoff

The IRS wants in on Bernie Madoff’s action.  The Tax Court is going to think about it.

Bernard Kessell died in July 2006.  He might have died content believing he was leaving a healthy investment portfolio for his heirs.  After all, just one part of the portfolio had issued its most recent month-end statement showing a value of $3,221,057.  That statement was issued by Bernie Madoff.

Of course Mr. Madoff was arrested in 2008 and is now residing in federal prison on charges arising from the Ponzi scheme that victimized Mr. Kessell and so many others.  The real value of the securities in Mr. Kessell’s Madoff portfolio was zero.

But the IRS isn’t letting that get in the way.  The agency says Mr. Kessell’s estate should pay estate tax on the value that Mr. Kessell died thinking he owned, rather than the zero actual value.  It wants to piggyback on Mr. Madoff’s fraud to tax an estate value that wasn’t there.

The IRS asked the Tax Court for summary judgment that the asset to be taxed was the account itself, not the vaporous underlying assets, and that because Mr. Madoff hadn’t been unmasked, a willing buyer would pay full sticker for the lying value on the Madoff statements.  The Tax Court court wasn’t willing to go along on summary judgement:

We cannot say on the record before us, however, whether that agreement constituted a property interest includible in Decedent’s gross estate separate from, or exclusive of, any interest Decedent had in what purported to be the assets held in the Madoff account. This question is best answered after the parties have had the opportunity to develop the relevant facts at trial. We will therefore deny respondent’s motion on this point.

As to the issue of the value, Judge Kroupa had this to say (citations omitted).:

     Respondent argues that a Ponzi scheme, by its very nature, is not reasonably knowable or foreseeable until it is discovered or it collapses. Respondent notes Mr. Madoff’s particular skill and that his Ponzi scheme was not disclosed until it collapsed in December 2008. Respondent then reasons that Mr. Madoff’s Ponzi scheme was knowable or foreseeable only at the point when it collapsed — when the amount of money flowing out of Madoff Investments was greater than the amount flowing in. For purposes of this motion, at least, we disagree.

Some people had suspected years before Mr. Madoff’s arrest that Madoff Investments’ record of consistently high returns was simply too good to be true. Whether a hypothetical willing buyer and willing seller would have access to this information and to what degree this information would affect the fair market value of the Madoff account or the assets purportedly held in the Madoff account on the date Decedent died are disputed material facts.  Thus, we will deny respondent’s motion on this point as well.

The rule on how assets are valued is in Reg. Sec. 20.2031-1(b):

 The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.

Most folks would consider the fact that the account was invested in a Ponzi scheme to be one of those relevant facts.  I guess that’s why most of us don’t work at IRS.

Cite: Estate of Bernard Kessel, T.C. Memo. 2014-97.

 

20130121-2The AICPA doesn’t care for the “voluntary” IRS preparer regulation proposal.  The Hill.com reports:

That system, the AICPA argues, would create implied government backing for those preparers who comply with the standards, while punishing those who do not.

“The proposed voluntary system would undoubtedly leave the impression among most taxpayers that certain tax return preparers are endorsed by the Internal Revenue Service (IRS),” according letter.

Further, nonbinding standards would fail to root out bad actors, according to the group.

“As a practical matter, any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return preparers,” the group contends.

All excellent points.  The AICPA has figured out that the “voluntary” program would eventually be voluntary like United Way contributions were “voluntary” when I was a green staff accountant at a national accounting firm.  They were voluntary, but amazingly, participation in the drive was always 100%.  Maybe the AICPA leaders still remember their staff accountant days.

I would add one more point.  Commissioner Koskinen and Taxpayer Advocate Olson never tire of telling us how underfunded the IRS is.  If so, why are the diverting some of their already inadequate resources to start a new nonessential program?  The obvious answer is they are trying a back door power grab now that the courts have barred the front door.

Going Concern: The AICPA Voiced “Deep Concerns” About the IRS’ Voluntary Tax Preparer Proposal.  “This means war…”

Larry Gibbs, Recent Developments in the IRS Regulation of Return Preparers (Procedurally Taxing).  A long guest post by a former IRS Commissioner about the power grab he never tried.

 

Russ Fox, New Identification Rules Go Over Like a Lead Balloon:

In this morning’s post, Joe Kristan told his readers to call the IRS. I agree; I urge all tax professionals to speak to or email their IRS Stakeholder Liaison.  

Russ quotes a new post by Jason Dinesen, I Was Wrong: We SHOULD Be Outraged About the New IRS E-File Requirements, which Jason followd up with Questions to Ponder About New IRS E-file Requirements.  I love Question 8: “How many ID thieves use a tax pro?”

Robert D. Flach has a special Thursday Buzz!, which includes Robert’s take on “voluntary” preparer regulation and the new IRS e-file requirements.

 

20140321-3TaxGrrrl, Still Looking For Your Tax Refund? Errors, 4464C Letters And Other Explanations

Peter Reilly,  Tax Court Threatens To Sanction Courtroom Commando Mac MacPherson.

Kay Bell, NYC arena Madison Square Garden pays no property taxes

Me, IRS Releases Applicable Federal Rates (AFR) for June 2014

 

William McBride, High U.S. Corporate Tax Rate Chases Away Companies, Jobs and Tax Revenue (Tax  Policy Blog).  If it didn’t, it would be a fascinating case of economic actors failing to respond to incentives.

TaxProf, The IRS Scandal, Day 378

Renu Zaretsky, Relief, Credits, Cuts, and Roads.  The TaxVox daily headline roundup talks about new tax relief for Minnesotans and the continuing worthlessness of film tax credit programs for everyone but filmmakers.

Cara Griffith, Should Taxpayers Challenge States if They Fail to Enact Rules? (Tax Analysts Blog):

State regulations are often vague or ambiguous, and authorities can use that to their advantage. But states should not be permitted to simply take the position that is in their best interest. They should be required to provide guidance and clarification on the positions they intend to take and, even better, clear-cut examples of how that position will be applied. And if a position will be applied to an entire industry, the state should issue a rule.

States prefer Calvinball rules.

 

Tax Justice Blog, Junk Economics: New Report Spotlights Numerous Problems with Anti-Tax Economic Model.  I suspect the biggest problem is that TJB doesn’t care for any model that doesn’t justify infinitely-high tax rates.

 

Des Moines, sometimes you are just adorable:

adorable des moines

Des Moines has started posting commute travel times, just like a big city.  On a bad day, it could be as much as 2 minutes to downtown from here.

 

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Tax Roundup, 5/21/14: Practitioner Pitchforks and Torches edition. And: math remains hard!

Wednesday, May 21st, 2014 by Joe Kristan

20140521-1The new identification rules for remote signatures aren’t going over well.   (See update below.)  At a CPE event yesterday former IRS Stakeholder Liaison Kristy Maitre outlined the new e-filing identity match requirement we are supposed to meet (now!  for extended 2013 returns!).  These include “third-party verification” of identities of our long-time clients if they don’t visit the office.  The ones that visit, we only need to see their papers.

The 250 or so practitioners present didn’t appreciate the joke at all.  They asked the obvious question: how do we even comply with this?  It’s not at all clear how we get “third-party verification.”  I can pretty much guarantee that nobody is complying with that requirement now, because few are aware of it, and the ones that are don’t know where to start.

While the requirements are supposed to be part of the IRS war against identity theft, this effort is like responding to the attack on Pearl Harbor by bombing Montreal.  Identity thieves don’t waltz into tax prep offices and pay us to prepare fraudulent refund claims.  They prefer TurboTax.

Yet, there may be a method to the madness, suggested by one practitioner.  What if some outfit is gearing up to provide third-party verification services — say, one of the national tax prep franchises?  And the IRS has quietly created their revenue stream with this absurd rule?  You might say this preparer is cynical; I say he’s been paying attention.

So let’s fight.  Kristy is collecting comments and questions to send to her erstwhile IRS colleagues to try to stop this nonsense.  Send your comments to ksmaitre@iastate.edu.  I believe the IRS will back off if we brandish the electronic torches and pitchforks.

Update, 11:30 a.m.  I received a call from an IRS representative this morning saying that they have been getting phone calls as a result of this post (well-done, readers!).  She tried to reassure me by telling me that the third-party verification doesn’t apply to in-person visits.  I knew that.  I told her that as I read the rules, there are either “in-person” or “remote” transactions, with no third category of, say, “I’ve worked with this client for many years and they’re fine.” She didn’t disagree, though she still thinks I’m overreacting.  She did say IRS field personnel are  “elevating” the issue and seeking “clarification” from the authors of these new rules, including what “authentication” means for in-person visits and what a “remote transaction” is that would require third-party verification.  Keep it up, folks!

Related:

Russ Fox, Yes, Mom, I Need to See Your ID

Jana Luttenegger, Updated E-Filing Requirements for Tax Preparers

Jason Dinesen, Hold the Phone on the IRS E-file Outrage Machine 

Me, Welcome back, loyal client. IRS says I have to verify that you aren’t a shape-shifting alien.

 


20140521-2TaxProf, 
The IRS Scandal, Day 377.

News from the Profession.  Crocodile Injured By Falling Circus Accountant in Freak Bus Accident (Going Concern)

Kay Bell, National Taxpayer Advocate joins fight to stop private debt collection of delinquent tax bills.  I’d rather she fight to keep the IRS from implementing its ridiculous e-file verification rules.

TaxGrrrl, Congress, Ignoring History, Considers Turning Over Tax Debts To Private Collection Agencies

Jim Maule, It Seems So Simple, But It’s Tax.  “People are increasingly aware that the chances of getting away with tax fraud are getting better each day.”

Missouri Tax Guy,  NO! The IRS did not call you first.

 

Tax Justice Blog, Legislation Introduced to Stop American Corporations from Pretending to Be Foreign Companies.  How about we just stop taxing them?

Kyle Pomerleau, Tom VanAntwerp, Interactive Map: Where do U.S. Multinational Corporations Report Foreign Taxable Income and Foreign Income Taxes Paid? (TaxPolicy Blog).  Holland does well, as does Canada.

Howard Gleckman, Tax Chauvinism: Who Cares Where a Firm is Incorporated?

So we are left with a sort of financial chauvinism. It is important to some politicians to be able to say that a company is a red-blooded American company. But when it comes to multinational firms in a global economy, why does that matter? 

Because, ‘Merica!

 

Andrew Mitchel now has some online tax quizzes for your amusement.  If they are too tough, the next item might restore your self-esteem.

 

20120905-1If you can’t answer these questions, taxes are the least of your problems.  Tackle these quizzlers (via Alex Taborrok):

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow.

More than $102. Exactly $102,. Less than $102? Do not know. Refuse to answer.

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy.

More than, exactly the same as, or less than today with the money in this account? Do not know. Refuse to answer.

3. Do you think that the following statement is true or false? ‘Buying a single company stock usually provides a safer return than a stock mutual fund.’

T. F. Do not know. Refuse to answer.

I won’t give away the answers, but I shouldn’t have to.  Sadly, most people find these questions hard.  From Alex Taborrok:

Only about a third of Americans answer all three questions correctly (and that figure is inflated somewhat due to guessing). The Germans and Swiss do significantly better (~50% all 3 correct) on very similar questions but many other countries do much worse. In New Zealand only 24% answer all 3 questions correctly and in Russia it’s less than 5%.

At least that helps explain Vladimir Putin’s popularity.

 

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Tax Roundup, 5/20/14: Credit Suisse, felon. And: yes, tax credits are subsidies.

Tuesday, May 20th, 2014 by Joe Kristan

 

credit suisse logoThe big news in the tax world today is the Credit Suisse guilty plea.  From the Wall Street Journal:

Credit Suisse Group became the first financial institution in more than a decade to plead guilty to a crime Monday when the Swiss bank admitted it conspired to aid tax evasion and agreed to pay $2.6 billion to settle a long-running probe by the U.S. Justice Department. The criminal charge filed Monday in federal court outlined a decades-long, concerted attempt by Credit Suisse to “knowingly and willfully” help thousands of U.S. clients open accounts and conceal their “assets and income from the IRS.”

This has to make some folks nervous:

While Credit Suisse isn’t turning over names of account holders as part of the agreement, they are handing over information that Deputy Attorney General James Cole said would lead to specific account holders.

Swiss bank secrecy is dead, and bank secrecy anywhere is pining for the fjords.  Proceed accordingly.

The TaxProf rounds up coverage.

Jack Townsend, Credit Suisse Pleads to One Count of Conspiracy to Aiding and Assisting 

 

Wind turbineI hate it when I have to disagree with somebody I respectbut I have to disagree with this from A. Barton Hinkle, writing about wind energy credits:

A tax credit is just that: a credit against the amount a taxpayer owes. As the IRS explains, a tax credit “reduces the amount of tax for which you are liable.” That is vastly different from a direct grant, in which the government takes money from Jones and gives it to Smith. In the case of a tax credit, none of Jones’ money goes into Smith’s pocket. Rather, Smith gets to keep more of his own money. Smith’s tax credit doesn’t cost Jones a cent.

Let’s assume that Jones and Smith are competitors.  Because of the tax credit, Smith can charge less than he otherwise would and still makes more than Jones.  Jones finds his margins are squeezed.  This tax credit absolutely costs Jones money.  A big enough credit to Smith can put Jones out of business.  And in a free market, there’s a Jones for every Smith.

Yes, some tax credits are more egregious than others.  Refundable credits, like the Iowa research credit, and transferable credits, like the defunct Iowa film credit, are the worst.  They are little more than government scrip generated by filing tax returns.

Non-refundable credits are slightly less bad, because they are only available to people who actually pay taxes.  Still, they are economically equivalent to special-purpose vouchers issued by governments that can be applied to pay taxes — limited purpose subsidies.  If the government issued vouchers that could only be used to, say, buy housing or cell phones, nobody would dispute they are subsidies.

Special purpose deductions are less distortive still.  But all special tax favors have a common flaw — they all involve the government allocating investment capital.  The 20th Century proved that to be a poor idea.  And running the subsidies through a tax return doesn’t make them any less subsidies; they only become easier to hide.

Related: Governor’s press conference praises construction of newest great pyramids

 

20140520-2Jason Dinesen, If You’re a Sole Proprietor, There’s No Such Thing as a “Salary” for Tax Purposes:

When a sole proprietorship accounts for its net income, it does so by taking gross income minus expenses. Those expenses DO NOT include draws. So, the proprietor is taxed on the net income of the business and gets no deduction for the draws.

You may think that’s obvious, but I’ve had to explain this to clients.

 

Russ Fox, One Good Crime Deserves Another.  “Oft evil will shall evil mar.”

Kay Bell, I’ll take tax code section 179 for $500, Alex

Peter Reilly, TIGTA Alimony Report May Cause Crisis Of Conscience Among Tax Professionals .  “I have to tell Terry that the IRS will notice the discrepancy, but the odds are 25 to 1 that they won’t do anything about it.”

Robert D. Flach is right on time with his Tuesday Buzz.  He notes the AICPA oppostion to the proposed “voluntary” preparer regulation system:

Clearly the AICPA is afraid, and rightfully so, that a voluntary RTRP certification would take 1040 business away from its members – because the designation would identify individuals who have proven competence specifically in 1040 preparation.  Currently the taxpayer public erroneously thinks that the initials CPA are an indication of a person’s competence in 1040 preparation, which is simply not true. 

I can’t speak for the AICPA, but I think they are right to oppose it.  In addition to destroying whatever is left of the Enrolled Agent brand, I think the “voluntary” program will be voluntary in the same way that donations to United Way were voluntary at a prior employer.  “It’s voluntary, and we always have 100% participation.”  And considering how bad the IRS is at what it is supposed to be doing, it really doesn’t need to take on new tasks.

 

Keith Fogg, Private Debt Collection – An Idea Whose Time Will Never Come (Procedurally Taxing).  “My concerns about the proposal fall into four broad categories mentioned above: training, accountability, system impact and proper incentives.”

I would permit private collection in limited circumstances —  for undisputed debts that the IRS isn’t bothering to collect.  With proper controls, I think it could work.  There is nothing magical about having official government employees do it.   But the Treasury Employees Union will make sure it never happens.

 

taxanalystslogoJeremy Scott, The Medical Device Excise Tax Derails Extenders (Tax Analysts Bl0g).  “Political games involving the medical device excise tax threaten to completely derail the passing of an extenders package in the near future.” Come on, the extenders are just a political game to begin with, using Calvinball rules.

Renu Zaretsky, A Pleading Bank, a Rejected Offer, and Taxing Gas and Pot.  The TaxVox headline roundup covers Uruguay’s nurturing a surprising local industry.

TaxProf, The IRS Scandal, Day 376

Alan Cole, When Broad Bases Are Actually Narrow Bases (Tax Policy Blog):

If I rent out my property to you, I pay taxes income used to buy the property, and I pay taxes on the rental income derived from it. In contrast, if I lived in the property myself, I would not have to pay the additional layer of taxes. It’s the same house either way, but because people are eager to “broaden” the base, they end up taxing it twice in some circumstances, and only once in others. A true “broad” base is a tax on personal expenditures – one that ultimately falls on the people who actually consume.

That’s precisely why “preferential” capital gain rates are really just piling on, and why the proper rate for them is probably zero.

Going Concern, The AICPA Has Nuked The CPA2Biz Brand in Favor of CPA.com.  Now if they can just do something about that disturbing mascot.

 

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