Posts Tagged ‘tax administration’

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

Wednesday, June 3rd, 2015 by Joe Kristan

 

Flickr image courtesy John Snape under Creative Commons license

Flickr image courtesy John Snape under Creative Commons license

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

Good. Why?

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

Amen.

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

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

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

In case you are wondering, Iowa is #50.

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

 

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

TaxProf, The IRS Scandal, Day 755

 

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

 

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Tax Roundup, 3/3/15: ‘Tens of thousands’ of returns delayed by ACA. Also: Feds, Iowa provide partial deadline relief for farmers.

Tuesday, March 3rd, 2015 by Joe Kristan
Taxpayer Advocate Nina Olson

Taxpayer Advocate Nina Olson

Tax season is saved! Tax Analysts reports ($link) that the IRS is sitting on “tens of thousands” of returns affected by the Obamacare advance premium tax credit:

Speaking March 2 in Washington at an American Payroll Association event sponsored by Bloomberg BNA, Olson said the returns have been “held for quite a long time, since the beginning of the filing season,” because the IRS is still waiting for matching data from state health insurance exchanges. The returns are being held in suspense and the IRS has instructed its employees not to inform taxpayers why their return is being suspended when the taxpayer contacts the Service, she said.

According to Olson, the Taxpayer Advocate Service will not follow the IRS’s instructions to remain silent on the issue because taxpayers have the right to be informed under the taxpayer bill of rights.

More of Commissioner Koskinen’s famous committment to transparency and disclosure. But all is well, right?

Olson said her office has received days of training on the ACA so her employees are prepared when these cases come in. “I think this is one of the most complicated provisions that we’ve ever inserted into the Internal Revenue Code” and I’m “astonished at the complexity of it,” she said.

“I’m very concerned about the filing season,” Olson said, adding that the federal exchange has already sent erroneous reporting information to 800,000 taxpayers.

Just yesterday the IRS, on the due date for farmer and fisherman returns where no estimated tax was paid, waived estimated tax penalties for such taxpayers where they are still waiting on 1095-A forms from their healthcare exchange. This follows the universal waiver of late payment penalties for amounts owed on the advance premium credit, the waiver of ACA penalties on health insurance premium reimbursement plans, and the last-minute waiver of Form 3115 requirements for smaller businesses under the repair regs. It’s an overwhelmed IRS desperately patching up a failing tax season with duct tape and wire.

 

binFeds extend 1040 deadline to April 15 for farmers awaiting form 1095-A; Iowa extends deadline to April 15 for all farmersFarmers are eligible for a special deal that lets them not pay estimated taxes, as long as they file and pay the balance due by March 1. The deadline was yesterday because March 1 was on a Sunday this year.  As we reported yesterday, the IRS issued a last-minute waiver of the deadline for farmers still awaiting their Form 1095-A from an ACA exchange.

Yesterday Iowa followed suit. The Iowa Department of Revenue sent this to practitioners on its email list (I can’t find a link on the Department website; the emphasis is mine):

The Iowa Department of Revenue has granted an extension to all farmers and commercial fishers to file 2014 Iowa individual income tax returns without underpayment of estimated tax penalty.

If at least 2/3 of their income is from farming or commercial fishing, taxpayers may avoid penalty for underpayment of 2014 estimated tax in one of the following ways:

(1) Pay the estimated tax in one payment on or before January 15, 2015, and file the Iowa income tax return by April 30, or

(2) File the Iowa income tax return and pay the tax due in full on or before March 2, 2015.

The issuance of corrected premium tax credit forms (Form 1095-A) from the Health Insurance Marketplace may affect the ability of many farmers and fishers to file and pay their taxes by the March 2 deadline.

Therefore, any farmers or fishers who miss the March 2 deadline will not be subject to the underpayment of estimated tax penalty if they file and pay their Iowa taxes by April 15, 2015.

The Iowa relief is not limited to farmers awaiting a 1095-A. The slightly tricky thing: non-farmer Iowa 1040s are due April 30, but the new farmer deadline is April 15. Be careful out there.

Related: Paul Neiffer, IRS Has Impeccable Timing (As Usual)

 

 

W2All is well.  Tax Analysts reports ($link) Additional Medicare Tax Reporting Is Causing Problems. It quotes Paul Carlino, an IRS branch chief:

Carlino explained that reporting amounts in Form W-2 box 6 that do not equal the 1.45 percent tax on wages has caused confusion among taxpayers, some of whom seek refunds believing their employer withheld an incorrect amount of tax.

Carlino said that another problem is taxpayers who are not having the additional Medicare tax withheld. 

The Additional Medicare Tax is unique among federal payroll taxes in that it is computed at separate rates for married and single filers, requiring a reconciliation on the 1040. That can result in underwithholding.

 

Russ Fox, Don’t Call Us:

When I called today I reached the normal recording, but every time I attempted to obtain help for an individual not in collections (that’s one of the options when calling the PPS) all I got was, “Due to extremely high call volumes that option is not available now. Please try your call again later.”

Well, the IRS has other priorities than your silly tax return, peasant.

 

TaxGrrrl, Tax Checks Go Up In Flames After Mail Truck Burns. Sums up this tax season.

Robert Wood, Obama Immigration Fix: 4M Illegals Who Never Paid U.S. Tax, Get 3 Years Of Tax Refunds. Only about 25% of EITC payments are made improperly. What could possibly go wrong?

William Perez, Moving Expenses Can Be Tax-Deductible

Kay Bell, Jeb Bush reportedly won’t sign no-tax pledge

Soon, my precious, soon.

Soon, my precious, soon.

Peter Reilly, Lois Lerner Out From Under Freedom Path Lawsuit For Now

TaxProf, The IRS Scandal, Day 663, quoting James Taranto from the Wall Street Journal: “So the IRS admittedly denied tax-exempt status improperly to at least 176 groups, tried to apply extralegal restrictions to others, and is still delaying approval for those groups that have gone to court in an effort to vindicate their rights.”

 

Alan Cole, How to Dismantle an Ugly IRS Worksheet (Tax Policy Blog):

The difficulty of the worksheet is not the fault of the IRS. If anything, the IRS put a very difficult concept into a one-page worksheet. But even with the worksheet’s good design, it’s still 27 lines. That’s because the underlying tax code it deals with is not elegantly designed.

The post goes on to explain how our system of taxing corporation income twice leads to this complexity.

 

Martin Sullivan, High Hopes for Highway Funding: A Bridge to Nowhere (Tax Analysts Blog). “Congress is talking a lot about long-term solutions to our infrastructure funding problem, but will likely only do another short-term patch.”

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Renu Zaretsky asks Can Expectations Be Too Low? In today’s TaxVox headline roundup. (No, by the way.). The post addresses the low IRS audit rate for businesses, the IRS plan to issue retroactive earned income tax credit to beneficiaries of the executive amnesty for illegal immigrants, and the upcoming Supreme Court arguments in King v. Burwell on whether the IRS exceeded its authority in granting ACA credits in states that didn’t set up exchanges under the act. 

 

Career Corner, Here Are Some Coded Phrases You Will Hear During Busy Season (Andrew Argue, Going Concern)

 

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Tax Roundup, 2/12/15: The Federal $21 billion thief subsidy; the Iowa $37 million corporation subsidy.

Thursday, February 12th, 2015 by Joe Kristan

Lincoln

Accounting Today visitors: click here for the post on the updated auto depreciation limits.

Happy Lincoln’s Birthday. President Lincoln signed the first U.S. income tax into law in August, 1861, to cope with costs of the Civil War and the loss of income from customs collections in the rebellious states.  Wikipedia says the tax was initially 3% on income over an $800 exemption. Right away they started tinkering, and adding expiring provisions:

The income tax provision (Sections 49, 50 and 51) was repealed by the Revenue Act of 1862. (See Sec.89, which replaced the flat rate with a progressive scale of 3% on annual incomes beyond $600 ($12,742 in 2009 dollars) and 5% on incomes above $10,000 ($212,369 in 2009 dollars) or those living outside the U.S., and perhaps more significantly it was explicitly temporary, specifying termination of income tax in “the year eighteen hundred and sixty-six“).

The rates were increased again in 1864 to a top rate of 10%, but it actually was allowed to expire after the end of the war.

For some reason, this early version of the income tax isn’t a big topic in history books. Something else must have been going on then.

 

Rashia says "thanks, Commissioner!"

Rashia says “thanks, Commissioner!”

April 15, the thieves holiday Tax-refund fraud to hit $21 billion, and there’s little the IRS can do (CNBC):

Tax-refund fraud is expected to soar again this tax season, and hit a whopping $21 billion by 2016, from just $6.5 billion two years ago, according to the Internal Revenue Service.

And the problem—which the agency admits is growing quickly—is compounded by an outdated fraud-detection system that has trouble identifying many attempts to trick it.

$21 billion. The entire tax system of the state of Iowa raises maybe $8 billion, and the IRS issues $21 billion annually to thieves. Not counting earned income credit fraud, of course.

I’m no IT expert, but saying the IRS is helpless sounds like a cop-out. Even with obsolete technology, the IRS has been slow to stop obvious fraud, such as multiple (say, hundreds of) refunds going to a single bank account. The agency allowed this crisis to spin out of control years ago. Practitioners certainly knew about it during Doug Shulman’s execrable term as IRS commissioner, but he spent his efforts trying to regulate practitioners and harass the Tea Party, while grossly failing at the more basic duty of not wiring money to theives. Commissioner Koskinen obviously hasn’t solved the problem. I think it’s fair to conclude that they just haven’t considered it their biggest problem.

This should be the highest IRS priority, certainly more so than the “voluntary” preparer program. It should also be the highest oversight priority of the tax writing committees in Congress, who should be able to find a way to find the necessary funding in a way that keeps the Commissioner from diverting it to pet projects. Of course, the history of IRS technology upgrades isn’t very encouraging.

It’s possible that the solution will also require taxpayers to wait longer for refunds. It takes a lot longer to get a refund when your identity is stolen anyway, so it’s probably worth taking a little more time. But when technology exists to enable the credit card company to call me when my wife is buying an expensive dress in Chicago, the IRS ought to be able to notice someone like Rashia Wilson before she fills her purse with Benjamins.

Related: TurboTax Fraud May Impact Federal Returns Too, FBI Investigating (Robert Wood)

 

Iowa’s $37 million corporate subsidy programNot everybody knows that the State of Iowa mails subsidy checks to business taxpayers, including $11.7 million just to one. Iowa’s research credit is “refundable,” which means once it wipes out your Iowa tax, the state sends you a check for any remaining credit.

The total 2014 Iowa research credits claimed was $56,918,030 for 2014, according to the newly-issued Iowa Research Activities Tax Credit Annual Report for 2014. (Hat tip: Iowa Fiscal Partnership). Sixteen companies claimed $42 million of the credit, according to the report:

RAC2014

I know everybody thinks they have earned whatever cash they have coming from the state, and I’m not shy about claiming refundable credits for my clients. When the state offers you cash, you’d be foolish not to take it. Still, there’s no way this makes any sense from a tax policy perspective.  The money sent to a few taxpayers should be used to lower rates for everyone, or to help eliminate the futile Iowa corporation income tax.

 

William Perez, Last Year’s State Refund Might be Taxed on Your Federal Return

TaxGrrrl, IRS Releases Latest Version Of Its Mobile App – And Something’s Missing. Service!

Russ Fox, A Bipartisan Tax Bill? I’ll Drink to That! “It’s to end age discrimination against bourbon and whiskey.”

Peter Reilly, Lois Lerner’s Old IRS Team Looking Anti-tech. “…now I’m thinking there might be a full blown Luddite cult operating in there.”

Jason Dinesen, Tips For Financing a Small Business: Part 1 of 5 — There’s Going to Be Paperwork, Deal With It

Kay Bell, Got your tax refund yet? IRS issued 7.6 million in January

 

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Principal Park, home of the Iowa Cubs. About 2 months until opening day!

 

Andrew Lundeen, Proposed Tax Changes in President Obama’s Fiscal Year 2016 Budget (Tax Policy Blog). “In total, the plan includes $2.4 trillion in proposed tax increases offset by $713 billion in new credits, deductions, and other offsets, for a total tax increase of nearly $1.7 trillion over the next ten years.”

Cara Griffith, Series LLCs: The Next Generation of Passthrough Entities? (Tax Analysts Blog). I think they will continue to be the wave of the future, as they have been for years now.

TaxProf, The IRS Scandal, Day 644

 

Career Corner. Interruptions at the Office: Good or Bad? (Adrienne Gonzalez, Going Concern). Bad, unless cookies are implicated.

 

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Tax Roundup, 2/6/15: Iowa pass-through top rate: 47.2%. And: a forgiving IRS!

Friday, February 6th, 2015 by Joe Kristan

Accounting Today visitorsThe post about the convicted filmmaker is here.

 

Taxing employers at high rates? That’s OK, they’re rich! Pass-through Businesses can Face Marginal Tax Rates over 50 percent in Some States (Kyle Pomerleau, Richard Borean, Tax Policy Blog):

Today, Pass-through businesses pay a significant role in the United States Economy. They account for 95 percent of all businesses, more than 60 percent of all business income, and more than 50 percent of all employment.

Iowa ranks at about the middle, with a 47.2% combined top rate on pass-through income.

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When lazy politicians think they can cover their incontinent spending just by sending the bill to the rich guy, they don’t tell you that they’re talking about leaving your employer that much less money to hire and pay you.

 

TIGTAI’m sure they’ll be just as forgiving to the rest of us. Accounting Today reports: IRS Rehired Hundreds of Misbehaving Employees with Conduct Problems:

The Internal Revenue Service rehired hundreds of former employees with prior conduct or performance issues, including employees who failed to file their taxes, falsified official forms and misused IRS property, according to a new report. 

The report, from the Treasury Inspector General for Tax Administration, acknowledged that most rehired employees do not have performance or conduct issues associated with prior IRS employment. However, TIGTA said it identified hundreds of former employees with prior substantiated conduct or performance issues ranging from tax issues, unauthorized access to taxpayer information, leave abuse, falsification of official forms, unacceptable performance, misuse of IRS property, and off-duty misconduct.

I like this “second chance” policy. I hope they roll it out to the rest of us.  Robert Wood has more: IRS Rehires Hundreds Of Problem Former Employees.

 

Conformity update: The Iowa House of Representaties went home for the weekend without approving SF 126. The Iowa Senate approved the bill this week. SF 126 continues through 2014 Iowa’s practice of conforming to the extender provisions other than bonus depreciation. This will mean Iowans will be able to claim the $500,000 maximum Section 179 deduction on their state returns. I expect the House to pass it next week.

 

1099-CTax Pros, the IRS isn’t your collection agentThat seems to be the implication of this item sent as an email by the IRS Office of Professional Responsibility to practioners yesterday. It addressed the idea of sending a 1099-C, reporting cancellation of debt income, to deabeats who fail to pay a tax return prep fee:

It is difficult to conceive of a situation in which a tax professional, principally engaged in providing tax services will be an “applicable entity” justifying the use of Form 1099-C to attribute income to an arguably scofflaw client for the nonpayment.

So it’s back to old standbys like cyberstalking and prank phone calls, then.*

*I kid! I kid!

 

TaxGrrrl, Minnesota Stops Accepting Returns Filed With TurboTax, Cites Fraud Concerns. It may be that Turbotax is just too popular with the wrong kind of customer. “Banned in Minnesota” can’t be good for Turbotax sales.

 

IMG_1232William Perez, Tax Refunds by Direct Deposit: How to Do It and Problems to Prevent. Some sage advice: “Triple Check Your Bank Account Information Before Filing Your Tax Return”

Kay Bell, Don’t forget local levies when adding up sales tax deduction

Paul Neiffer, Excessive Claims for Fuel Tax Credits Makes the IRS “Dirty Dozen List”. You mean you didn’t use 1000 gallons in your lawn tractor this summer?

 

Clint Stretch, Defining Tax Reform (Tax Anlaysts Blog):

To date, nearly everyone describing tax reform, from the U.S. Chamber of Commerce to the White House, has called for “a simpler tax code.” Not so the Senate Democrats. When they use the words “tax reform,” those words do not mean simplification but do mean many things conservatives would leave out of their own definition, such as progressive taxation.

It is tempting to think that whoever drafted the letter merely forgot simplification, or assumed it to be understood. But the Democrats’ proposal to have tax incentives “take into account the varying cost of living differences among States and regions” makes it clear: Simplification is not one of their core values.

Oddly, Mr. Stretch doesn’t seem to be a fan of simplification. He spent many years as a lobbyist for a national accounting firm I once worked for, so I suppose that’s unsuprising.

 

TaxProf, The IRS Scandal, Day 638

Howard Gleckman asks, How Will Jeb Bush Turn His Vision of Government into Tax Policy? Maybe by writing letters to his Congressman. It won’t be by becoming President, I’m pretty sure.

 

Peter Reilly has what seems to me an unnatural interest in the tax problems of “young earth creationist” Kent Hovind. In a long piece Peter explains his interest. It’s long, but this is worth noting:

Whenever I think about disputes that are really passionate, there is one thing that I never forget.  If something really awful were to happen in my community there would be an outpouring of support from people across the country.  Many of them would have views that I consider preposterous and dangerous.  Regardless, we are still in it together.

I’m still puzzled at the interest in this particular sad case, but Peter comes across as thoughtful and humane all the way through.

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Career Corner (?). Ex-Crazy Eddie CFO Now Judging Fellow Criminals on Their Criminal Talents or Lack Thereof (Adrienne Gonzalez, Going Concern), quoting Sam Antar on conviction of New York representative Michael Grimm:

My former bosses running Crazy Eddie would never have let an amateur like Grimm participate in our tax-evasion schemes! If you are to engage in any scheme to skim money and evade taxes, there is one golden rule: Never leave an audit trail.

Michael Grimm left behind a body of evidence in the most convenient places for the federal investigators to help bury him.

We discussed that very issue in our discussion of the Arrow Trucking tax plea yesterday. I hate to think I’m starting to think like Mr. Antar.

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Tax Roundup, 1/14/15: Education credits to delay refunds? And: it’s not volunteering when you’re paid.

Wednesday, January 14th, 2015 by Joe Kristan
Kristy Maitre

Kristy Maitre

If your tax refund this year seems to take forever to arrive, education credits might be involved. The invaluable Kristy Maitre, former IRS Stakeholder Liaison and now with the Iowa State University Center for Agricultural Law and Taxation, has leaned that the IRS may delay refunds on returns claiming the “American Opportunity Credit.” From an e-mail she has distributed:

If your client is getting the American Opportunity Credit this year you need to be aware of a possible “refund hold” on the credit to verify attendance at the college. At this time we “assume” only that part of the refund will be held and the other part of refund not related to the American Opportunity Credit will be released.

At this time we are not sure who this will impact, IRS appears to want to keep it a BIG secret. Our concern is that the tax preparer will be blamed for the delay of the refund and overall it would make the preparer look bad as well as having to deal with an upset client due to the issue. I was able to find some criteria in a new IRM, but we need more information from IRS.

Your client should be  informed by IRS of the reason the refund is being held and that once the 1098-T from the accredited institution is verified the refund will be released,  or they will receive a Letter 4800C to inform them if further documentation is required to allow the education credit…

The AOTC is a “refundable” credit; if the credit exceeds the tax computed, the IRS will pay you the excess. Given the high incidence of refund fraud involving refundable credits like the AOTC, it’s understandable that the IRS would want to verify eligibility before issuing a refund.

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.

Unfortunately, this verification will come from matching 1098-Ts issued by colleges and universities. These forms, which purport to show tuition paid, are notoriously unreliable. The inevitable matching errors will leave some taxpayers trying to get their refunds fixed well into the summer.

This highlights the unwisdom of using the tax law as the Swiss Army Knife of public policy. It’s hard enough to get taxable income right. Congress also assigns IRS education policy, health care, social welfare, industrial policy, campaign finance regulation, you name it. Like with the Swiss Army Knife, you can only add so many functions before you make it bad at being a knife.

 

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Commissioner Koskinen wants us to blame cuts in his budget for tax refund delays. In a memo to IRS employees, he outlines the dire effects of the cuts in his agency budget, including:

Delays in refunds for some taxpayers. People who file paper tax returns could wait an extra week — or possibly longer — to see their refund. Taxpayers with errors or questions on their returns that require additional manual review will also face delays.

It’s foolish of Congress to pile work onto the IRS and then cut its budget. That said, Mr. Koskinen has brought a lot of this on himself with his combative and tone-deaf response to the Tea Party scandal.

Also, there’s a bit of the Washington Monument Strategy in his memo, by making cuts in areas that inflict pain on taxpayers. I would be more convinced that the IRS is really committed to making taxpayer service a priority if his list of budget adjustments included sending to the field, or laying off, the hundreds of full-time IRS employees who do only union work. He would be more convincing if he said the “voluntary” preparer regulation initiative was on ice until funding improves. Instead, the Commissioner puts the National Treasury Employees Union and his own power grab ahead of processing refunds.

 

No Walnut STVolunteering. I don’t think that word means what you think it means. From Governor Branstad’s 2015 Condition of the State address:

 In addition, I am offering legislation creating the Student Debt Reorganization Tax Credit. This tax credit allows individuals to volunteer for worthy causes within Iowa’s communities and in exchange have contributions made toward their student debt.

There is so much wrong with this, beyond the idea that it’s “volunteering” when you get paid for it. It’s one more random addition to an already ridiculous mishmash of distortive and unwise education subsidies. It’s one more incentive for students to take on debt they can’t otherwise afford. And it misplaces human capital from productive for-profit enterprise to the black hole of the government and non-profit sector.

Iowa Form 148 already lists 32 different tax credits. The Governor thinks adding some more is the solution to Iowa’s problems. I think the credits are a big part of the problem, as they help make the Iowa tax law the complex high-rate mess that it is.

 

William Perez, How Soon Can We Begin Filing Tax Returns?

Kay Bell, Reducing your 2014 tax bill using exemptions, deductions

Jason Dinesen, H&R Block Doesn’t Really Have ACA “Specialists” On Staff. A bold charge, but a convincing one.

Peter Reilly, Can Walgreen Stance On Property Tax Hurt Income Tax Position Of 1031 Investors? Thoughts on getting too cute in analyzing the value of a real estate interest.

Leslie Book, Can IRS Change Taxpayers from Procrastinators to Payors By Drafting Letters that Make Taxpayers Feel Bad? (Procedurally Taxing). Usually people feel bad when they get a letter that says “notice of levy,” but that’s not what he’s talking about.

Robert Wood, Citizenship Renunciation Fee Hiked 422%, And You Can’t Come Back

Jack Townsend, Another UBS Depositor Sentence; Consideration of the Role of Potential Deportation

 

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David Brunori, Using the Poor for Fixing the Roads (Tax Analysts Blog):

The Michigan Legislature passed a bill that would significantly increase the state’s earned income tax credit. Some 800,000 Michigan families will see tax relief. I think that is a good thing. But the change won’t go into effect unless voters approve a sales tax increase from 6 percent to 7 percent.

I don’t share David’s enthusiasm for the EITC, but I do appreciate the absurdity of the sales tax link.

Kyle Pomerleau, Representative Van Hollen Releases New $1.2 Trillion Tax Plan.  “Unfortunately, most of Representative Van Hollen’s tax plan would move the U.S. further away from having a competitive, modern tax code.”

TaxProf, The IRS Scandal, Day 615. This installment covers a Tea Party group that has been waiting five years for Lois Lerner’s old office to approve their exemption application.

 

Career Corner. Age and accounting as a second career (Caleb Newquist, Going Concern)

 

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Tax Roundup, 12/2/14: Dead provisions to arise for just a few weeks? And: Shocker! IRS Commissioner wants more $$$

Tuesday, December 2nd, 2014 by Joe Kristan

lazarus risingCongress to let the Lazarus provisions make it to the end of 2014? The White House’s threat to veto the Senate’s deal to permanently extend some of the perennially expiring tax provisions has killed that proposal. Now it looks like Congress will take up a bill to extend the provisions, which expired at the end of 2013, through the end of this year. That means we get to do this all over again next year. The Hill reports:

The vote on a short-term extension, expected as soon as this week, would come after a veto threat from President Obama derailed a developing $400 billion deal between Senate Majority Leader Harry Reid (D-Nev.) and House Ways and Means Chairman Dave Camp (R-Mich.) that would have extended some expired tax breaks indefinitely, as well as others for two years.

Republicans on both side of the Capitol suggested the move showed that a one-year deal was the only proposal with a chance of becoming law.

The article says “practically all” of the provisions that expired at the end of 2013 will be included. The Lazarus provisions that will come back to life include, among many others:

– A $500,000 Section 179 deduction for asset purchases that would otherwise be capitalized and depreciated.

– 50% “bonus depreciation”

– The research credit

– The five-year built-in gain period.

– The allowance of tax-free distributions from IRAs to charities.

The full text of the bill is available here: (HR 5771)

So we will get a 2014 tax law just as 2014 comes to an end. Because there is no election, there is hope that we won’t have to wait until December 2015 to know what the tax law is for 2015. Not exactly a shining moment in tax policy.

The bill also includes technical corrections for tax bills going back to 2004.

Related:

How the White House torpedoed Harry Reid’s tax deal (The Hill)

The Politics and Policy of Tax Extenders (Len Burman, TaxVox). “In theory, allowing tax provisions to expire periodically could precipitate a careful reexamination of the effectiveness of each program in light of our fiscal situation and priorities. In practice, the expiration of popular temporary provisions such as the R&E credit creates a vehicle for all sorts of budget-busting mischief.”

 

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.

TaxGrrrl has posted another installment of her interview with IRS Commissioner KoskinenYou may not be astounded to hear that he wants more money:

With spending cuts already taking a toll on taxpayer services, the agency is bracing itself for another tough season. In fact, Koskinen cites funding the IRS as his biggest challenge since taking office last December.

“It’s a serious problem for us,” he says. “I don’t know who got our $500 million but I’ll bet they’re not gonna give you back the $2-3 billion we would have if we had it.”

Given that the Congress has used the tax law as the Swiss Army Knife of public policy, with responsibilities including attempting to run the broken Obamacare machine, it’s not unreasonable to think IRS has increased needs for funds.

That said, the Commissioner has nobody to blame but himself. His tone-deaf and confrontational tone with Republicans investigating the political abuse of the Exempt Organizations function has earned him no friends in the party that controls the purse strings. The sudden appearance of 30,000 Lois Lerner e-mails that he insisted could not be recovered killed any credibility he had left. Only a new commissioner has any hope of turning that around.

The Commissioner also says he has cut spending to the bone:

The agency is already down 3,000 employees last year. Another 2,000-3,000 are on their way out by the end of this year. The current rate of replacement is one new employee for every five employees who leave… 
What gets cut next? The Commissioner is clear that it will be more personnel. That is, he noted, all that’s left.

Well, maybe. I’d be more convinced of that if he decided there just wasn’t enough cash lying around for his “voluntary” tax preparer initiative — a blatant attempt to get around the Loving decision shutting down mandatory preparer regulation.

Related: Robert Wood, Horrible Bosses, IRS EditionPeter Reilly, Restoring Trust In IRS Is A National Imperative

 

buzz20141017Robert D. Flach has posted his fresh Tuesday Buzz, including a link to his post at The Tax Professional on tax preparer civil disobedience in ACA enforcement. I will have more to say about this topic later this week.

William Perez explains Itemized Tax Deductions

Russ Fox, Mundane Tax Fraud Downs Friend of Cicero Town President

Keith Fogg, Appeals Fumbles CDP Case and Resulting Resolution Demonstrates Power of Installment Agreement (Procedurally Taxing)

Jason Dinesen, 5 Things You Didn’t Know About Enrolled Agents

Jack Townsend, More on Willfulness. You can’t break the law if you aren’t trying.

Kay Bell, December to-do list: shopping, family visits and tax tasks

 

TaxProf, The IRS Scandal, Day 572

Andrew Lundeen, Kyle Pomerleau, Less Than One Percent of Businesses Employ Half of the Private Sector Workforce (Tax Policy Blog). “On the other hand, while only 0.4 percent of all firms have over 500 employees, this small group of businesses employs 50.6 percent of the nation’s private sector workforce, with most of those employees working for C corporations.”

News from the Profession. This Timesheet-Addicted Managing Partner Will Make You Grateful Not to Work For Him (Adrienne Gonzalez, Going Concern). A charming threat of dismissal issued the day before Thanksgiving will always make you thankful for an updated resume.

 

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Tax Roundup, 11/6/14: You pretend to complete the form, we’ll pretend to care. And: election mania!

Thursday, November 6th, 2014 by Joe Kristan

Accounting Today visitorsthe godawful link you seek is here.

 

20120905-1Don’t worry about getting it right, just make it look good. IRS personnel trying to appease angry practitioners at an AICPA Tax Division gathering had some strange and annoying things to say yesterday.

Practitioners are upset at the IRS insistence on Form 3115 accounting method change applications with 2014 returns from everyone moving into compliance with the new rules on repair and capitalization costs.  Tax Analysts reports ($link):

Participants in the tax methods and periods panel at the American Institute of Certified Public Accountants fall Tax Division meeting in Washington said that some taxpayers don’t want to pay the high costs associated with going through years’ worth of records to calculate a precise section 481(a) adjustment required under the final regulations (T.D. 9636). The cost of that level of compliance could be more than the entire cost of preparing their returns, practitioners said, adding that the taxpayers are considering filing their method changes with corresponding section 481(a) adjustments of zero.

The piece cites Scott Dinwiddie, special counsel, IRS Office of Associate Chief Counsel (Income Tax and Accounting):

Taxpayers were taking aggressive positions, so the government didn’t want to provide an across-the-board cutoff in the final regulations, he said. Instead, it required 481(a) adjustments as a way to allow field agents to examine taxpayers’ aggressive positions, he said.

So because some taxpayers were taking positions you didn’t like, you want to require everyone to do a bunch of wasteful and meaningless busy work during our busiest time of the year. Got it.

Dinwiddie said that, barring a situation in which the taxpayer has taken aggressive positions in the past or has in no way applied a proper capitalization method, the IRS is unlikely to have much interest in examining a taxpayer’s section 481(a) adjustment now.

So we pretend to file an accurate Form 3115, and they pretend to care. Well, you have to admit that considering the budget and enforcement restraints on the IRS, this approach is… absolutely insane. Taxpayers have to pay for a bunch of nonsense compliance, and the IRS doesn’t care whether it’s right. The IRS still has to incur processing costs. I’d love to see the IRS cost-benefit worksheets on this one.

 

20120810-1The TaxProf has a roundup of observations on the whether tax reform can happen in the new Congress, including this from William Gale:

It is a good bet that the new Republican Congress will continue to talk about tax reform. That is safe ground for Republicans generally. And, of course, seemingly impossible things do sometimes happen. But I wouldn’t bet on tax reform. 

A wise non-bet.

 

TaxGrrrl, What Matters Most When It Comes To Tax Reform? Hint: It’s Not Control Of Congress:

What is interesting, however, is that most of the significant tax policy changes in the modern era are more closely tied to the length of presidential terms. Every president has a budget – and an agenda – but real shifts in rates and policies tend to happen during a second term (or en route to a second term) no matter which party is in control. 

I don’t expect it to happen this time.

 

Scott Drenkard, What Do the 2014 Midterm Election Results Mean for State Tax Policy? “My prediction is that this means that taxes will be one of the biggest, if not the biggest issue in state policy next legislative session, and that tax reform will become even more of a bipartisan issue.”  I’m afraid that’s not true here in Iowa.

Russ Fox, Nevada Goes Deep Red. “Do you remember 1928? Well, that was the last time Nevada had a Republican governor, a Republican State Assembly, a Republican State Senate, and Republicans holding all major statewide offices.”

Paul Neiffer, A Christmas Present?! “They will meet over the next six weeks or so and around Christmas time we will get the final tax package.”

 

 

20120702-2Arnold Kling’s characteristically wise observation on the election results:

Conventional wisdom is that, relatively speaking, Democrats have a structural advantage in Presidential elections, because those elections attract more turnout. In other words, they do much better among disengaged voters. One could spin this positively for the Democrats, saying that they get support from the weaker segments of society. One could spin this negatively and say that they rely on a segment of the electorate that is poorly informed and easily bamboozled, which I believe is the case. The counter to that would be that Republicans also rely on a segment of the electorate that is poorly informed and easily bamboozled, which I also believe is the case.

While I don’t agree with all of what he says, the whole post is brief and well worth reading. So is this from Don Boudreaux:

I advise freedom-loving and free-market-appreciating Americans (of which I am unashamedly one) to be good Tullockians about the results of yesterday’s landslide wins for the G.O.P.  The Republicans who won those elections are, after all, politicians – and it is the rare politician, of whatever party, who reliably puts principle above personal interest.  As a rule, politicians are untrustworthy, duplicitous, and cowardly; they are people who have an unusually powerful craving for power and fame; and the successful among them typically posses an unusual talent for camouflaging their craving for power and fame as a saintly calling to ‘serve the people.’

Pretty much. But some are less bad than others, enough so that I do bother to vote.

Renu Zaretsky, Don’t Call It a Comeback… Yet.  The TaxVox headline roundup is full of post-election links, including news of Berkeley, California, passing an idiotic soda tax. When they start taxing mocha lattes, I’ll believe they’re such taxes are about public health than moral vanity.

 

20141016-1

And some folks are actually talking about things other than the election:

Jana Luttenegger, Even Startups Need to Have the Conversation (Davis Brown Tax Law Blog).

Jason Dinesen tells us A Little Bit About Sole Proprietorships, Part 1

William Perez, Dividends: Taxes and Reporting

Robert D. Flach recounts EXPLAINING MORTGAGE INTEREST AND INVESTMENT INTEREST FOR A CLIENT

Jim Maule discusses how Mortgage Loan Modification Can Imperil Interest Deduction

Stephen Olsen at Procedurally Taxing as a new round of Summary Opinions., with links to news from the world of tax procedure.

Jack Townsend, The Honorable Jed Rakoff on Why Innocent People Plead Guilty. He quotes Judge Rakoff: “…the guidelines, like the mandatory minimums, provide prosecutors with weapons to bludgeon defendants into effectively coerced plea bargains.”

Kay Bell, 5 tax record keeping questions … and answers!

TaxProf, The IRS Scandal, Day 546

News from the Profession. McGladrey Reminds Audit Staff to Stay Billable This Busy Season (Caleb Newquist, Going Concern)

 

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Tax Roundup, 10/27/14: IRS visits Arnolds Park restaurant, tips itself.

Monday, October 27th, 2014 by Joe Kristan

20120703-2IRS Commissioner Koskinen likes to say there is nothing wrong with the IRS that a bigger budget can’t cure. A story out of Arnolds Park, Iowa might cause one to question that. The New York Times reports:

For almost 40 years, Carole Hinders has dished out Mexican specialties at her modest cash-only restaurant. For just as long, she deposited the earnings at a small bank branch a block away — until last year, when two tax agents knocked on her door and informed her that they had seized her checking account, almost $33,000.

The Internal Revenue Service agents did not accuse Ms. Hinders of money laundering or cheating on her taxes — in fact, she has not been charged with any crime. Instead, the money was seized solely because she had deposited less than $10,000 at a time, which they viewed as an attempt to avoid triggering a required government report.

Banks are required to report “suspicious” deposits under $10,000 because they might be done to evade a required IRS filing. As they get in trouble for non-reporting, they are likely to overreport. And in these cases, that’s all the IRS required before stealing the cash. The victims have legal recourse, but it requires them to sue the federal government, owner of the largest law firm in the world; legal bills routinely run into tens of thousands of dollars.

So, without any evidence, or even suspicion, of a crime, the IRS uses some of its allegedly precious and constrained enforcement resources to steal money from a little Iowa restaurant. The story cites other cash seizure nightmares. One involved an Army sergeant saving for his daughters’ education. Others involved legitimate but cash-intensive businesses.

If this is what the IRS accomplishes with insufficient resources, imagine how much they could steal with full funding.

(via Instapundit)

Related:

Tax Justice Blog,  New Movie Aims to Scare Public by Depicting IRS as Jack-Booted Thugs. Where would anybody get that idea?

Dan Mitchell, Another Example of Government Thuggery – and another Reason Why Decent and Moral People Are Libertarians

Russ Fox, SARs Leading to Forfeiture: The IRS Oversteps

 

20141027-2Jason Dinesen, How Non-Residents or Part-Year Residents Report Federal Refunds on Iowa Tax Returns. One more complication from Iowa’s deduction for federal taxes.

Robert D. Flach, DON’T TRY TO BUY A HOUSE OR CONDO WITH ONLY 5% DOWN!. And don’t try to subsidize that either.

William Perez, Self-Employed Retirement Plans, “If you have self-employment income, then you can take a tax deduction for contributions you make to a SEP, SIMPLE, or a solo 401(k) retirement plan.”

Tony Nitti, The Top Ten Tax Cases (And Rulings) Of 2014: #9-Tax Court Further Muddies The ‘Dealer Versus Investor’ Issue

 

TaxGrrrl, Fundraising Campaign Ends For ‘Ebola Free’ Nurse, Donors Encouraged To Contribute To Charity

Jana Luttenegger, 2015 Retirement Plan Limits Announced (Davis Brown Tax Law Blog)

Paul Neiffer, 2015 Social Security Wage Base Increases to $118,500

Kay Bell, 6 year-end tax tips for small businesses

Stephen Olsen, Summary Opinions (Procedurally Taxing). Recent cases on whistleblowers, interest abatement, and art valuation.

 

 

Andrew Mitchel, 2014 Third Quarter Published Expatriates – Third Highest Ever. FATCA and the IRS holy war on Americans abroad takes its toll.

20141027-1

 

TaxProf, The IRS Scandal, Day 536

 

David Brunori on the inherently corrupt nature of corporate welfare tax incentives, like those so popular with Iowa politicians ($link):

I have no doubt there are more instances of companies contributing to politicians and getting economic development payouts. I’m not naïve. Corporations donate money to governors and lawmakers and expect a return on their investment. While the governors cited above were Republican, corporations and business interests don’t discriminate. Indeed, Lockheed Martin donated lots of money to Democratic governors.

We likely won’t find a smoking gun e-mail reading, “Dear Governor, your check is in the mail, please process my multimillion-dollar handout. Your friend, CEO.” Politicians and business leaders are too smart for that. But growing evidence of tax incentives being granted by politicians who receive money should give everyone pause. It’s unlikely to be a coincidence.

But, jobs! For the middlemen, fixers and lobbyists, anyway.

 

Joseph Henchman, Michigan Senate Advances Film Tax Credit Extension Bill (Tax Policy Blog). Because Detroit has no greater need than to give money to Hollywood.

 

News from the Profession. Meet the Guy Who Prefers Falafel Over PwC (Adrienne Gonzalez, Going Concern)

 

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Tax Roundup, 7/2/14: How to make the least of that office manager job. And: IRS gets around to the obvious!

Wednesday, July 2nd, 2014 by Joe Kristan


20140508-2No office manager is paid enough for this.  
The tax law doesn’t like it at all when an employer withholds payroll taxes from paychecks and fails to pass it on to the IRS.  One tool the IRS uses to encourage compliance is the “responsible person” penalty.  If a person with responsibility for remitting payroll taxes knowingly fails to do so, the IRS can assess that person with a 100% penalty — even if that person didn’t get any of the money.

A Virginia federal district court recently drove that lesson home to a Ms. Horne, an office manager for a medical practice:

A. Responsible Person

Horne was a responsible person for the Company for each quarter of 2006 through 2010. First, Horne was the Company’s Officer Manager throughout that time period. Second, Horne had substantial authority over payroll because she prepared and signed the Company’s payroll checks. Third, because Horne was charged with preparing checks to creditors, she necessarily determined which creditors to pay. Fourth, Horne participated in day-to-day management of the Company, including making decisions about employee compensation, maintaining the Company’s books and records, and preparing financial information to be presented at shareholder meetings. Fifth, at all relevant times, Horne had authority to, and did, sign checks drawn on the Company’s bank account. Sixth, Horne participated in decisions regarding the hiring and firing of employees.

B. Willful Action

From 2006 to 2010, Horne was aware of the Company’s unpaid employment tax liabilities as they accrued. However, she continued to prepare and sign checks to pay other creditors in preference over the United States. Accordingly, the Court finds that Horne acted willfully in failing to pay over to the Service the taxes withheld from the wages of the Company’s employees.

IV. CONCLUSION

For the aforementioned reasons, the Court will GRANT the Motion. Horne is, thus, liable to the United States in the amount of $2,926,809.51, plus statutory interest accruing from December 23, 2013. 

 

It’s hard to save $2.9 million even on the best office manager salary.

Update:  An excellent point made in the comments:  “I feel for anyone placed in the tough position of losing a job to avoid liability for an employer’s inability to pay its tax liability to the IRS, but the 100% penalty imposed by Section 6672 on responsible persons makes it clear that the job is not worth the tax problem arising from a company’s failure to pay its trust fund taxes.”

 

Cite: Miller v. United States et al.; No. 3:13-cv-00728

 

 

20130723-3IRS takes obvious measures to fight refund fraud five years late.  From Tax Analysts ($link)

     Starting in January 2015, the IRS will no longer make direct deposits of more than three tax refunds into one financial account, Commissioner John Koskinen told tax return preparers at the IRS Nationwide Tax Forum in Chicago July 1.

The move is meant to enhance the IRS’s efforts to combat stolen identity refund fraud, Koskinen explained in prepared remarks for his address to the forum.

Any refund after the third will automatically be converted to a paper check and mailed to the address on the tax return, Koskinen told preparers. “We will send out notices to those taxpayers that their refunds are being mailed and they should expect to receive them in about four weeks from the time of mailing,” he said.

That’s a good start.  Perhaps next the IRS can flag multiple refunds being sent to the same address — like the 655 refunds to a single apartment in Lithuania.  Baby steps.  Like this:

The IRS also plans to end the practice of a small number of preparers who serve as banker to their clients or who take fees from the refunds, Koskinen said. “We’ve identified about 4,400 personal accounts held by tax preparers where multiple refunds were deposited,” the commissioner said. “We’re putting a stop to that, too.”

No doubt some of these are full service firms that do your taxes, collect your refund — and spend it for you.

 

William Perez, Divorce and Taxes.  “We take a look at tax planning principles for property settlements, alimony and child support.”

Howard Gleckman, A Payroll Tax Math Error Adds $5 Billion To The Deficit (TaxVox).  “But the current law for the self-employed allows the full deduction of 7.65 percent—not only for earnings below the Social Security cap but, remarkably, even for earnings subject only to the 1.45 percent Medicare tax.”

Kay Bell, State tax law changes — from gas to sales to businesses and even soccer — take effect July 1

 

taxanalystslogoDavid Brunori, A Revenue Department Behaving Badly (Tax Analysts Blog).  “Documents (except for taxpayer information of course) produced by the “government” belong to the citizens.”

Kelly Davis, Kansas: Repercussions of a Failing Experiment (Tax Justice Blog).  “But the Governor’s experiment now appears to be in meltdown mode: revenues for the last two months have come in way under projections and may leave the state short of the cash needed to pay its bills.”

Lyman Stone, Scott Eastman, Liz Emanuel, Tyler Dennis, Courtney Michaluk, Independence Day Brings Fireworks Taxes to Light (Tax Policy Bl0g).  Hey, Iowa, if they aren’t legal, it’s harder to tax them.

Janet Novack, U.S. Taxpayers With Secret Offshore Money Face New Risks And Options 

Jason Dinesen, From the Archives: Iowa Deduction Finder — Insurance Premium Tax Deduction

Peter Reilly, Military Housing Allowance Much More Limited Than Clergy’s

TaxGrrrl, IRS Announces Shorter, Faster Application For Some Tax Exempt Organizations

Robert D. Flach, MORE INFO ON THE NEW IRS ANNUAL FILING SEASON PROGRAM.  “I still think in its current form it is stupid, and that very few tax preparers will actually ‘volunteer’.”

Robert is right.

 

Megan McArdle ponders the version of the email erasure story from Lois Lerner’s attorney:

This weekend, William Taylor III, Lerner’s lawyer, went on television and described Lerner’s experience. Lerner came in one morning in 2011, he said, turned on her computer and got a blue screen.

That interested me, because the description is quite specific. What he seems to be describing is the famed Microsoft Windows “blue screen of death.”

Well, because as I mentioned above, the Blue Screen of Death is an operating system error. The operating system lives on the hard drive. Which raises a question: If Lerner’s hard drive was so thoroughly malfunctioning that no one could even get the data off of it, how was it booting up far enough for the operating system to malfunction?

She comes up with some potential explanations — which mostly assume it didn’t quite happen the way the lawyer describes.

 

20140516-1John Hinderaker,  More on the IRS’s Illegal Destruction of Evidence

True the Vote’s brief points out that the first lawsuit alleging discriminatory targeting of conservative groups was filed by a pro-Israel group called Z Street, Inc., on August 25, 2010. On that date, at the very latest, the IRS had a legal duty to take measures to ensure that no emails, correspondence, memoranda, notes, or other evidence of any sort that could be relevant to the case was lost or destroyed…

But, according to IRS representatives who have testified before Congressional committees, the IRS ignored the law. Instead of making sure that relevant information was preserved, the IRS blithely continued erasing back-up email tapes every 90 days. Further, the IRS continued its policy of assigning each employee a ridiculously small space on an email server, and then authorizing employees (like Lois Lerner) to delete at will to keep space open. And, finally, when Lerner’s hard drive crashed ten months after the Z Street case was commenced, the IRS made no effort to preserve it, but rather, by its own account, recycled the hard drive in a business-as-usual manner.

Don’t try this at home, kids.

 

TaxProf, The IRS Scandal, Day 419

 

You should never be to busy to file correct tax returns.  Appeals court upholds Beavers’ tax conviction.

 

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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, 5/6/14. Welcome back, loyal client. IRS says I have to verify that you aren’t a shape-shifting alien.

Tuesday, May 6th, 2014 by Joe Kristan


e-file logo
It’s not enough that you’ve done business with me forever.  I need some ID.  
The invaluable Russ Fox yesterday threw light on new requirements for electronic filing from the IRS.  These requirements, found in their new Publication 1345, were issued with no public comment period or consultation with practitioners, as far as I can tell, and they sure look that way.

Let’s start with clients who come into our office — a minority of my clients, by the way, as most of my clients either mail in tax information or send it electronically.  Words are from Publication 1345, but emphasis is mine:

The ERO must inspect a valid government picture identification; compare picture to applicant; and record the name, social security number, address and date of birth. Verify that the name, social security number, address, date of birth and other personal information on record are consistent with the information provided through record checks with the applicable agency or institution or through credit bureaus or similar databases.

So I have clients I have been working with since 1985.  When retired gentleman comes in, a little slower than last year, with his cane, but still as charming as ever, I have to say “hold it right there, partner.  You may look like the client I’ve been working with for 28 years, but you might be a clever shape-shifting alien scum looking to defraud our government.  I need to see some picture ID.  Then excuse me while I call the credit bureau.”

This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

Oh, but it isn’t that bad:

For in-person transactions, the record checks with the applicable agency or institution or through credit bureaus or similar databases are optional.

Oh, I only have to run credit checks on my long-time clients who don’t come into the office.  Gee, that’s mighty kind of you, IRS.

Examples of government picture identification (ID) include a driver’s license, employer ID, school ID, state ID, military ID, national ID, voter ID, visa or passport.

“National ID?”  I guess that must be next in the IRS off-plan business plan.

You’re thinking, “calm down, Joe.  Surely you are overreacting.  The IRS doesn’t really want you to card your longtime clients, right?”  Well, wrong:

If there is a multi-year business relationship, you should identify and authenticate the taxpayer.

You may think they are longtime clients, but you don’t know if you’ve been fooled by imposters all along!

Of course, this is all a reaction to the identity theft epidemic that the IRS has allowed to spread virtually unchecked for years.  The IRS, an agency too clueless to notice that 655 refunds are going to the same apartment in Lithuania, is now responding to the riot it incited by firing at the bystandersqea0hm77.  It is creating an enormous new and uncompensated burden on preparers and their clients that will do nothing to eliminate ID theft.

Rashia didn't use these bundles of cash at a CPA office.

Rashia didn’t use these bundles of cash to pay preparers.

Why won’t this work?  Most ID thieves work like Rashia Wilson, the self-proclaimed “Queen of IRS Tax Fraud.”  She used store-bought software to claim millions in tax refunds belonging to other people whose identities she had stolen.  ID thieves don’t walk into legitimate tax shops and pay to have fraudulent refunds claimed.  

 

Oddly, none of this applies to paper filings.  If the IRS is really serious about these rules, they can expect preparers  to sabotage the e-file process in self-defense by charging for the non-trivial new time and hassle of e-filing.  While preparers are required to e-file unless otherwise directed, taxpayers are allowed to choose paper.  Nothing says we can’t inform them of that right.  If even 10% of taxpayers respond by choosing to revert to paper, it will badly strain IRS facilities.  If 20% revert to paper, it will be a debacle for the agency.  And they’ll richly deserve it.

 

Other Coverage:

Russ Fox follows up with A Better Idea on Identity Theft. “The IRS should check each tax return’s address to verify it matches the address on file for the taxpayer.”  What a radical thought.

Robert D. Flach notes the Russ Fox post in today’s Buzz and adds, “Thankfully I am not an ERO – and after reading this I never will be!”

 

Flickr image by Christian under Creative Commons license.

Flickr image by Christian under Creative Commons license.

Kay Bell, 5 tax tips for Cinco de Mayo

Tony Nitti, Tax Geek Tuesday: Determining A Shareholder’s Basis In S Corporation Stock and Debt

TaxGrrrl, She’s Just Not That Into You: 11 Reasons Your Tax Pro Wants To Call It Off .  ” You need to tell your tax professional the truth. No matter how ugly it is.”

Keith Fogg, When One Spouse Files Bankruptcy How Should the Court Split the Refund Resulting from a Joint Return between the Estate of the Debtor Spouse and the non-Debtor Spouse (Procedurally Taxing)

Jason Dinesen, Tax Refunds and “Not Owing Tax”, Part 2 . “So if you get a refund, it’s possible that you “didn’t owe taxes,” but only if your “total tax” before refundable credits equaled zero.”

Margaret Van Houten, Anti Money Laundering Initiatives and Lawyers: What We Need to Know (Davis Brown Tax Law Blog).  “Unfortunately, however, not all well-intended actions are effective.”

 

20140506-1TaxProf, The IRS Scandal, Day 362.  What the IRS was busy with while the ID-theft fraud epidemic was getting rolling.

Howard Gleckman, Special Tax Penalties on Donald Sterling are a Personal Foul (TaxVox).  Not every foul has to be a tax issue.

Mindy Herzfeld, International Tax Trending (Tax Analysts Blog)

I reject this false choice.  Investment, GDP Slow in First Quarter: Bad Weather or Bad Tax Policy? (Stephen J. Entin, Tax Policy Blog)

 

News from the Profession.  BREAKING: CPA Exam Candidate Passes AUD  (Going Concern)

 

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Tax Roundup, 4/21/14: Clearing the wreckage edition. And: Tax Court penalty abuse.

Monday, April 21st, 2014 by Joe Kristan

20140330-2So I took a five-day weekend.  I needed the sleep, and to see something besides the office, my bed, and my commuting route.  So now to clear the debris of the last few weeks from my desk, and my email inbox.

And I come back to see perhaps the dumbest thing ever to come out of the Tax Court.  Janet Novack reports:

“Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered  on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.

Which is more astounding: he IRS decision to seek penalties against a taxpayer for following IRS guidance, or the Tax Court going along?  A great deal of what we do as professionals, and what taxpayers do, is in reliance on IRS guidance, because often that’s all there is to go on.  If you can get hit with a penalty for following IRS guidance if the IRS changes its mind, we’re all avoiding disaster only as long as the IRS is in a good mood.

This unwittingly goes to the heart of the IRS non-enforcement of the Obamacare employer mandate. The statute provides that the penalty tax on those with 50 or more employees starts this year if they fail to provide specified health insurance.  Nothing in the statute provides otherwise.  The only thing standing between all these employers and massive penalties is IRS guidance — y0u know, the guidance that Judge Nega just said taxpayers rely on “at their own peril.”

The whole Tax Court should reconsider this order.  If they decide that something that stupid really is the law, Congress should reverse with legislation providing that taxpayers relying on written IRS guidance should never be penalized for it.

 

20130419-1Megan McArdle kindly linked to me last week in You Can’t Fight the IRS — specifically, to Tax season tip: when you owe and can’t pay.  She added some thoughtful commentary, including:

 There are basically three types of tax trouble. There is “I was underwithheld at work because my salary changed over the course of the year but didn’t realize it” or “I’m a freelancer or small-business owner, and I forgot to put away enough money for taxes, or I incorrectly estimated what my tax bill would be.” Then there is “I am a small-business owner or otherwise self-employed, and I am on the brink of financial collapse; the money with which I hoped to pay the taxes had to go to keep my creditors (barely) at bay.” And, of course, though I hope this is not you, there is “I have been cheating on my taxes.”

She notes that different troubles require different solutions.

Thanks to her link, and to one from Instapundit to the same post, last week was the busiest around here all year.  My thanks to them, and to everyone who takes the time to link here.  You rock my little world.  If you ever want to link to just a piece of a Tax Roundup, you can do so if it starts in blue bold letters, like the words “Megan McArdle” at the beginning of this segment.

 

While I was too busy to do Tax Roundups at the end of tax season, I missed some excellent Bozo Tax Tips from Russ Fox, including Bozo Tax Tip #1: The Eternal Hobby Loss

 

Greg Mankiw,Transitory Income and the One Percent:

It turns out that 12 percent of the population will find themselves in the top 1 percent of the income distribution for at least one year. What’s more, 39 percent of Americans will spend a year in the top 5 percent of the income distribution, 56 percent will find themselves in the top 10 percent, and a whopping 73 percent will spend a year in the top 20 percent of the income distribution….  

-Quoting a NY Times article by Mark Rank

Occupy… yourselves!

 

Jason Dinesen, Another Tax Season Down — 2014 Tax Season Recap 

Paul Neiffer, Another Tax Season Bites the Dust.  “This year was actually much easier on myself and I think most of my compatriots since we did not have Congress passing a tax bill on the last day of the year to mess up the IRS computers (although the computers have other issues to deal with).”

TaxGrrrl, IRS Reports Tax Filing Numbers As Expected, Issues Statement On Refund Delays 

Robert D. Flach, THAT WAS THE TAX SEASON THAT WAS.  “43 down – 7 to go!”  I hope to stop before 43, myself.  Robert is tougher than I am.

In case you missed it, you can see my April 15 interview with local TV station KCCI here.

 

 

Locust Street, Des Moines

Locust Street, Des Moines

Tony Nitti, Tax Geek Tuesday: Tax Planning For Mergers And Acquisitions, Part I.  “…if we spend the time necessary to uncover and understand our clients’ non-tax and tax goals, we will typically find that choosing an ideal transaction structure is largely a process of elimination, and when the dust settles, there will often be only one option that works.”

Peter Reilly, Sawyer Taxi Heirs Midcoast Fortrend Deal – Could Have Been Worse.  It involves a C corporation attempting to have its cake while eating it too, by paying stock-deal tax on an asset sale.

Christopher Bergin, Tax Day – It Just Isn’t Fair (Tax Analysts Blog)  “I suppose the only good news is that in the last several days, there have been dozens of items in the news reporting that the IRS is doing fewer audits.”

Tax Justice Blog, Partners in Crime? New GAO Report Shows that Large Corporate Partnerships Can Operate Without Fear of Audits

Kyle Pomerleau, Why Many People are Wrong about Executive Pay and the Corporate Tax Code.  “A neutral tax code that properly defines business income would place no restriction on how much a business can deduct in compensation.”

Howard Gleckman, If Congress Lets Firms Expense Investments, It Should Take Away Their Interest Deduction.  Fine, if you let them deduct dividends.

 

Going Concern, Utah Man Discovers Liberty Tax Not as Effective as Maury Povich in Determining Paternity.

 

 

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Tax Roundup, 2/6/14: Mortgage credit program revived for Iowa. And: why your state budget surplus is a mirage.

Thursday, February 6th, 2014 by Joe Kristan

IFA logoThe Iowa Finance Authority has opened a program that will allow some Iowans to claim a credit, rather than a deduction, for mortgage interest.  From an IFA press release:

The Iowa Finance Authority has announced that eligible Iowans may buy a home and reduce their federal income tax liability by up to $2,000 a year for the life of their mortgage.

The 2014 Take Credit Mortgage Credit Certificate program will be available beginning this week through IFA Take Credit Program Participating Lenders. Approximately 585 Iowa home buyers are expected to benefit from the program.

It has been some years since these credits were available in Iowa.

The credits aren’t for everyone.  They are targeted to lower-income borrowers, with income limits varying by county.  IFA has a “quick check” page for users to determine eligibility.  But for those who qualify, they are a handy way to reduce mortgage costs.  The credit is claimed on Form 8396.

 

TaxProf, TRAC: IRS Criminal Prosecutions Up 23.4% in Obama Administration.  This is probably due to the explosion in tax-refund theft that was less of a priority than regulating preparers was for the Worst Commissioner Ever and the Obama Administration.

 

taxanalystslogoCara Griffith, The Myth of the Budget Surplus (Tax Analysts Blog):

There seems to be a lot of good news about state budgets lately. Newspaper headlines have changed from doom and gloom over budget crises during the recession to questions about how states will manage budget surpluses. Unfortunately, there are financial problems lurking beneath the surface, and one of the largest may be the underfunding of state and local government pension and healthcare plans.

Even Iowa’s relatively well-funded pension plan is 20% underfunded actuarially, and even that uses an absurd assumption of 7.5% investment returns.  The Taxpayers Association of Central Iowa has a lengthy, but excellent, analysis.  Public defined benefit plans are a lie.  They are a lie to taxpayers understating the cost of current pension accruals, a lie to public employees about what they will get after retirement, or both.

 

Elaine Maag of TaxVox raises Questions About Expanding the Childless EITC:

The EITC is often criticized for its built-in marriage penalty. Imagine a single mom with three kids who earns $17,500. Prior to marriage, she qualifies for the maximum credit of $6,143. But if she marries someone with identical earnings, the additional income will reduce her EITC to just $3,670.

If the childless EITC were expanded and the husband had his own EITC, he would lose all or part of his benefit when the couple married, magnifying the tax increase this couple would face relative to when they were not married. As long as the EITC phases out at higher incomes and is tied to joint income, this will remain an issue.

Not to mention the massive level of EITC fraud and the punitive marginal tax rates on taxpayers working their way out of poverty.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

 

Jana Luttenegger, Expired Housing-Related Tax Rules (Davis Brown Tax Law Blog).  The exclusion for forgiven mortgage debt is the biggie.

William Perez, Finding the Right Filing Status.  If you are legally married, it’s either joint returns or married filing separate.  Single status is unavailable, even for same-sex couples married in a state that allows them to get married who live in a state that doesn’t.  William provides some excellent explanation.

 

20130419-1Janet Novack, IRS: Don’t Call Us, Look It Up On IRS.Gov.  Well, you might actually get a correct answer that way.

Kay Bell, What the ‘Taxman’ does and doesn’t collect 

 

TaxProf, The IRS Scandal, Day 273

Howard Gleckman, The Cruel Political Paradox of Deficit Reduction (TaxVox)

Carl Smith provides Another Update on Rand Cases in Tax Court at Procedurally Taxing.  The Rand cases hold that an “underpayment” for purposes of penalties does not include the portion of refundable tax credits that tax tax below zero.

Going Concern, Pot Taxes May Not Be Such a Cash Cow Due to, Well, the Cash.  Not to mention the disallowance of all non cost-of-goods-sold deduction for legal dealers.

 

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Tax Roundup, 1/20/14: If it’s not a scandal, it hurts like one. And: S corporation ESOP play in WSJ.

Monday, January 20th, 2014 by Joe Kristan

The U.S. District Court for the Southern District of Iowa didn’t need my services as a juror this week, so  I will be participating in the Iowa Bar Association webinar this afternoon on new developments for 2014.  It starts at noon.  You can register here and find more information here.   I will join Roger McEowen of the ISU Center for Agricultural Law and Taxation, and Kristie Maitre, IRS Stakeholder Liason for Iowa.

 

20130419-1If the Tea Party scandal is not a scandal, why would it be so damaging to the IRS?  The TaxProf’s IRS Scandal Roundup for Day 255 has some eye-opening quotes from a high-powered panel from a Pepperdine/Tax Analysts Symposium last week:

Donald Korb (Partner, Sullivan & Cromwell; former IRS Chief Counsel):  I think it is incredibly damaging.  Frankly, I see it as one of the seeds of the next tax shelter era. … And in terms of scandal, I don’t think we really know. We have not been permitted to understand exactly what happened. So, who knows.

George Yin (Edwin S. Cohen Distinguished Professor of Law and Taxation, Virginia; former Chief of Staff, Joint Committee on Taxation):  I think there has been tremendous damage.  Almost without regard to what actually happened.  And I actually despair of finding out what actually happened. …

Donald Tobin (Frank E. and Virginia H. Bazler Designated Professor in Business Law, Ohio State):  I think it is awful. I agree with Don and George.  7 or 8.  I think this is ultimately going to have huge implications. …

Ellen Aprill (John E. Anderson Chair in Tax Law, Loyola-L.A.):  I agree with all of that.  I have myself avoided the word “scandal” because I just don’t know.  And some of the people I know personally.  I don’t think that was their political motivation.  So I’ve used “controversy” and “brouhaha” and everything but tried not to go all the way to scandal. …

Korb: … This is very, very damaging.  Maybe we are at a 9.5

You can already see effects in the reduction of the IRS funding request in the latest budget deal.  While Congress makes the IRS the Swiss Army Knife of tax policy, it continues to cut back its resources.  That can’t end well.  But the GOP sees that the IRS has acted as a tool for its political opponents, and it’s asking a lot for them to fund their opposition.

 

Robert D. Flach ponders whether the Registered Tax Return Preparer designation could be revived as a voluntary credential.  If any group of preparers can unite behind a voluntary credential with self-administered standards, great.  Just keep the IRS out of it.  It’s a poor use of their resources, and they aren’t to be trusted with that sort of power.

 

S imageS imageS-SidewalkESOP S corporation strategy.  The Wall Street Journal (Laura Saunders, via the TaxProf) reports on an S corporation that may have found a way to funnel all of its income to a tax-exempt ESOP via restricted stock for the non-ESOP owners.  Paul Neiffer suspects it may be too good to be true.

It would be a hard needle to thread, giving the severe 409(p) excise tax that can apply to allocations of ESOP shares to owners of closely-held S corporation.  If the strategy does win in the courts, I would expect to see legislation to change the result quickly.

 

Jack Townsend, Eighth Circuit Affirms Offshore Account Related Conviction

 

Joseph Henchman, What Same-Sex Couples Need to Know This Filing Season  (Tax Policy Blog).  He links to a nice Tax Foundation study that tells how each state is approaching same-sex marriage this filing season.

Roberton Williams, Utah Lets Same-Sex Couples File Joint Tax Returns (TaxVox)

Kay Bell, Girl Scout cookies might be tax deductible.  Unfortunately, only if you don’t eat them.

Russ Fox, The Trouble With Bitcoins: Taxation.  “If you make money with Bitcoins, it is absolutely taxable.”

Jason Dinesen, Issuing 1099s to an Incorporated Veterinarian.  So veterinary services are “medical services.”

So the IRS agrees with Corb Lund.

 

Tax Justice Blog, Oklahoma Shows How Not to Budget.  “The biggest offender here is one we’ve explained before: the growing trend of funneling general tax revenues toward transportation in order to delay having to enact a long-overdue gas tax increase.”

William Perez, In Honor of Martin Luther King, Jr.  “In 1960, Dr Martin Luther King, Jr., was found not guilty of filing fraudulent state tax returns for the years 1956 and 1958.”  That’s why you don’t want politicized tax enforcement.

TaxGrrrl, Why Justice Matters: The Indictment & Trial Of Dr. Martin Luther King Jr. On Tax Charges   

 

Annette Nellen, Real revenue sources for tax reform.  “Where can permanent tax increases be generated to offset the desired permanent tax decrease generated from permanent lower rates?”

Good, we need it.  Bloggers = Media for First Amendment Libel Law Purposes (Eugene Volokh).  “To be precise, the Ninth Circuit concludes that all who speak to the public, whether or not they are members of the institutional press, are equally protected by the First Amendment.”

That’s how it should be.

Peter Reilly, Soldier To Tax Accountant – Rachel Millios EA   

 

News from the Profession.  CPA Exam Pass Rates Basically Went Right Off the Cliff at the End of 2013 (Going Concern).  

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Tax Roundup, 1/7/2014: Koskinen proposes voluntary IRS preparer certification. And: Obamacare, small business incubator?

Tuesday, January 7th, 2014 by Joe Kristan
This Koskinen isn't the IRS commissioner

This Koskinen isn’t the IRS commissioner

The new IRS Commissioner, John Koskinen, would like for IRS to oversee a voluntary preparer certification program if their preparer regulation power grab fails in the courts, reports Accounting Today. But he would still prefer the power grab:

“If you could require certification of preparers and some educational requirements, it would help taxpayers feel some level of confidence that preparers actually know what they’re doing, and the vast majority of them do,” Koskinen said during a conference call with reporters after he was sworn in ceremonially Monday by Treasury Secretary Jack Lew with an audience of many IRS employees in attendance. “My sense is that we should be able to provide that same educational training and that background to preparers. If you can’t require it, offer it, and if you complete the information, you get a certificate that says, ‘I have completed the IRS preparer course.’ I think that could be over time very valuable to preparers, and consumers could ask preparers, ‘Have you gone through the IRS training?’ Whatever happens with the court case, we ought to be able to move forward on that and provide taxpayers with as much assurance as we can that the preparers they are dealing with have met some kind of minimum standards.”

Somebody should point out to him that there already is such a program: the Enrolled Agent Program.  If the IRS runs the now-mothballed Registered Tax Return Preparer literacy test as a voluntary program, it will be a crippling blow to the more rigorous and underappreciated EA designation. Before he worries more about the competence of preparers, Commissioner Koskinen should fix his agency first (my emphasis):

“When I look at the impact of the budget and the implications of further cuts or what happens the next time there’s a sequester, the first thing that happens is the waiting time on a phone call goes up and our service goes down,” he said. “We try to get to 70 or 80 percent, but sometimes it gets as low as 50 or 60, which means at 50 percent that half the people who are calling are getting no answer at all and no satisfaction. It just seems to me that’s intolerable. Taxpayers deserve better, so we need to do whatever we can to provide the services that taxpayers need and expect. They ought to be able to dial the IRS number and get an answer promptly, and they ought to be able to get accurate information.”

Even the shabbiest storefront preparer at least processes more than half of its customers.

 

Why Iowa income tax reform will go nowhere this yearvia the Sioux City Journal:

Senate Democratic Leader Mike Gronstal, D-Council Bluffs, said Senate Democrats would formulate a tax-relief approach geared toward income tax cuts for middle-class Iowans, not the two-tiered plan being pushed by Republicans.

“Nobody in my caucus is going to go along with a scheme that leaves middle-class Iowans carrying more than their share of the tax burden in Iowa so rich people can choose whichever one works the best for them,” Gronstal said.

The idea that the state income tax system is somehow a way to fight The Rich Guy is willfully dumb, with zero-income-tax South Dakota right next door.  Oh, and you know what another word for “the rich” is?  Employers. 

Source: The Tax Foundation

Source: The Tax Foundation

 

Megan McCardle poses the question “Will Obamacare Inspire Small-Business Ownership?“:

One theorized benefit of the Patient Protection and Affordable Care Act is that it will unleash a new era of entrepreneurship. Undoubtedly, there are people in the U.S. who wanted to start a business but feared losing their health insurance. Now that they know they can buy it, presumably they’ll be freed to take risks without fearing that they could end up uninsured and uninsurable.

Unfortunately, we just don’t have that much empirical evidence. European nations with more generous social safety nets have lower rates of entrepreneurship than the U.S. does, even though a thought experiment might suggest that generous welfare programs would encourage people to take more risks. Nor did we see a radical unfurling of entrepreneurial energy in Massachusetts after RomneyCare.

She also points out that Obamacare is a kick in the head for businesses that actually succeed:

Meanwhile, of course, the law imposes significant new penalties for growing a company; anyone with more than 50 employees not only has to provide health insurance for their employees, but they also have to meet a substantial regulatory burden to demonstrate that they’re providing affordable coverage. That might discourage people from growing their firms. 

You know, it just might.

 

Russ Fox, Your Mileage Log — Start It Now (2014 Version).  You would not believe how much it helps in an IRS exam.  And doing it retrospectively when the IRS exam notice arrives tends to go badly.

Peter Reilly, Post Divorce Tax Intimacy Can Be Riskier Than Post Divorce Sex   Ewww…

Paul Neiffer, Roger’s Top Ten. “Roger McEowen from Iowa State University and their Center for Agricultural Law and Taxation (CALT) just listed his Top 10 Ag Law and Taxation Developments for 2014.”

William Perez, Resources for Preparing and Filing Form W-2 for Small Businesses

Robert D. Flach tells us WHAT’S NEW FOR NJ STATE TAXES FOR 2013

Kay Bell, Tax Carnival #124: Happy New Tax Year 2014

20120829-1

 

Martin Sullivan, Goodbye Baucus, Hello Wyden (Tax Analysts Blog): “On tax reform the current chair of the Senate Finance Committee has been a laggard. Wyden will be a leader.”

Jeremy Scott, A To-Do List for Wyden (Tax Analysts Blog).  Tax Reform, Extenders, and the Tea Party investigation.

TaxProf, The IRS Scandal, Day 243

 

Joseph Henchman, Parking and Transit Benefits Tax Exclusion Parity Expires Again; Congress Should Consider Permanent Fix.  (Tax Policy Blog).  “The tax code is probably the wrong place to be subsidizing commuters, and the entire provision ought to be eliminated. If Congress wishes to retain it, it ought to consider a non-expiring unified exclusion of all transportation commuting expenses.”

Tax Justice Blog, Corporate Income Tax Repeal Is Not a Serious Proposal.  Stawmen go up in flames.

Ben Harris, Rethinking Homeownership Subsidies (TaxVox).  He wants to revamp them.  I’d prefer to get rid of them.

 

TaxGrrrl, Cracker Barrel Waitress Serves Up Happiness, Gets Tip & More .  $6,000 more.

The Critical Question: Is College That Guy on eBay Who Never Paid For the Crap You Sent Him? (Going Concern)

 

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Tax Roundup, 12/10/2013: Penalize everyone edition! And one for me, one from you.

Tuesday, December 10th, 2013 by Joe Kristan

 

20120511-2IRS: shoot first, let the Tax Court sort it out later.  One of the most annoying features of exams in recent years is the IRS habit of imposing penalties on almost every underpayment, regardless of the cause or the taxpayers’ history of good compliance.  It’s nice to see a case like one in the Tax Court yesterday that held the IRS went too far.

The taxpayer were a married couple with a 50-year unblemished compliance history.  The wife’s employer switched from issuing paper W-2s to downloadable versions for 2010.  She didn’t get the memo, if there was one, and left her wage income off the couple’s 1040.  The IRS computers noticed and issued a notice and penalty; the taxpayers double-checked with their preparer and immediately paid the extra taxes, but they balked at the 20% underpayment penalty.

The Tax Court pointed out (all emphasis mine):

     Petitioners regard their tax situation as fairly complex, as they receive income from multiple sources, including two subchapter S corporations that lease farmland out of State. Petitioners worry about their ability to prepare accurate tax returns; accordingly, for many years, including 2010, petitioners have hired a certified public accountant (C.P.A.) to assist them in the preparation of their returns.

Petitioners are aware of the importance of recordkeeping, and for many years they have maintained a system for keeping track of documents that will be needed to prepare their returns. Thus, when petitioners received in the mail a tax document such as a Form W-2, Wage and Tax Statement, Form 1098, Mortgage Interest Statement, Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., or Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., they would briefly review it and then place it in a dedicated tax file, along with other tax-relevant documents that they collected throughout the year. In February or March petitioners would meet with their C.P.A. and furnish him with their tax file. Once the return had been prepared, petitioners would again meet with the C.P.A. to review the return.

So the taxpayers had a pretty good system in place to ensure compliance.  Yet the missing W-2 fell through the cracks — partly because their preparer thought the wife had retired.

     Petitioners’ failure to notice the absence of a Form W-2 for Mrs. Andersen was an oversight on their part. However, the oversight was at least partially understandable given both the number of petitioners’ tax documents and the fact that Mrs. Andersen never received from either her employer or her employer’s payroll agent a paper copy of a Form W-2, something that she had previously received throughout her career. Nor had Mrs. Andersen received notification from either of those parties that the payroll agent had discontinued issuing Forms W-2 in paper form in favor of making electronic copies available on the Internet.

Petitioners also failed to notice, when they reviewed their return with Mr. Trader, that Mrs. Andersen’s wages were not included on line 7. But when, as part of the review process, petitioners and Mr. Trader compared the 2010 return with the 2009 return, the parties noted the similarity of the amounts of income and the absence of any anomaly, thereby suggesting that no error had occurred. Indeed, the difference between the amounts of income reported on petitioners’ 2010 and 2009 returns was less than $1,000, or two-thirds of one percent of their 2009 income, a difference that would not ordinarily give rise to any suspicion that income had not been fully reported.

So the mistake was one a reasonable human would make.  But the IRS thinks no mistake is reasonable, apparently.  Fortunately the Tax Court held otherwise:

Clearly, petitioners made a mistake. But we think it was an honest mistake and not of a type that should justify the imposition of the accuracy-related penalty. In short, we think that petitioners’ diligent efforts to keep track of their tax information, hiring a C.P.A. to prepare their tax return, reviewing their return with the C.P.A. when it was completed, and prompt payment of the deficiency upon receipt of the notice of deficiency, together with the other facts and circumstances discussed above, represent a good-faith attempt to assess their proper tax liability. Accordingly, we hold that petitioners have carried their burden with respect to the reasonable cause and good faith exception under section 6664(c)(1) and that petitioners are therefore not liable for the accuracy-related penalty under section 6662(a).

So: good records, full cooperation with a reliable preparer, and prompt payment of any underpaid taxes on discovery of the underpayment were key.  It’s ridiculous that it took a trip to Tax Court to get what seems like the only appropriate and fair result.  The IRS should stop being so trigger-happy with penalties.  Maybe a sauce for the gander rule, where the IRS and IRS personnel are as liable for penalties on incorrect assessments as taxpayers are for those on underpayments, would get them to see reason.

Cite: Andersen, T.C. Summ. Op. 2013-100

 

Kyle Pomerleau, CBO Report Confirms that the Federal Government Redistributes a Substantial Amount of Income  (Tax Policy Blog, my emphasis):

They also break down taxes paid and spending received by income quintile. When looked at this way, the redistribution becomes very clear. According to their analysis, those in the lowest quintile received $22,000 in spending minus taxes. In contrast, taxes exceeded spending by $56,000 in the highest quintile.

Source: Congressional Budget Office

Source: Congressional Budget Office

 

When private think tanks like the Tax Foundation issue this sort of report, people favoring higher taxes on “the rich” dismiss it.  CBO numbers are harder to credibly attack as partisan.

But we can always find a dark side.   CBO Finds Growing U.S. Income Inequality (Roberton Williams, TaxVox)

 

William Perez, Selling Losing Investments as Part of a Year-End Tax Strategy.

Tony Nitti, IRS Addresses Deductibility Of Organizational And Startup Costs Upon Partnership Technical Termination.  By saying no.

TaxGrrrl, Tax Scammers Continue To Dial Up Trouble For America’s Seniors.  This is a big problem.  Unless they have contacted you by mail first, the tax folks aren’t going to phone you.  Just hang up.

Paul Neiffer, How $12,000 Becomes $6,000 or less.  By putting it in farmland, if crop prices stay where they are.

 

Stephen Olsen,  IRS says Hom Gonna Getcha on FBAR too.  “The Swiss government and banks are folding like a bunch of cheap patio chairs.”

Phil Hodgen, Voluntary Disclosure and Frozen Swiss Bank Accounts

Brian Mahany,  How To Respond When Your Foreign Bank Asks About Your IRS Compliance

Jeremy Scott, Will FATCA Ever Go Into Effect? (Tax Analysts Blog) “FATCA should be put into effect as soon as possible, and the administration should stop bending separation of powers rules by using delays to functionally repeal unpleasant parts of statutes.”

Nah, just repeal the whole mess.

 

 

20120510-1

Winter Carnival!  Tax Carnival #123: It’s Beginning to Look a Lot Like Tax Time (Kay Bell)

TaxProf, The IRS Scandal, Day 215

Um, no, was there one?  Remember the Tax Reform Act of 1995? (Clint Stretch, Tax Analysts Blog“What is certain is that the 1995 hope of creating a tax system that genuinely favors savings and investment is dead.”

It’s always a good Tuesday for a Robert D. Flach Buzz!

 

We hardly knew ye.  Farewell to Feel-Good Tax Reform (Martin Sullivan, Tax Analysts Blog)

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Tax Roundup, 11/13/13: Is more IRS money what we need? And why I’m hoping against hope!

Wednesday, November 13th, 2013 by Joe Kristan
Taxpayer Advocate Nina Olsen

Taxpayer Advocate Nina Olsen

Is more money the answer to “pitiful” IRS service?   That’s what Taxpayer Advocate Nina Olson believes, based on a story by Tax Analysts ($link):

National Taxpayer Advocate Nina Olson in a November 9 speech decried as pitiful the level of IRS customer service given to taxpayers, which she attributed to inadequate funding that has forced the Service to automate many of the most important tax administration functions and skimp on training employees on taxpayer rights.

Everything else being equal, you can do more with more money.  Yet we all face limits to our resources, so we prioritize.  The IRS — at the urging of Nina Olson — has directed resources unwisely to its misguided attempt to boss the tax prep industry.  It has been a debacle so far, and it appears headed to oblivion in the courts.

The IRS has another administrative problem that the Taxpayer Advocate has pointed out.  The tax law is too complicated to effectively administer even with a much larger budget.  The tax law is seen as the Swiss Army Knife of public policy, and like a knife with too many gadgets, it becomes hard to work as a knife.  This chart from Chris Edwards at the Cato Institute illustrates the problem:

irs budget cato 20131113

 

Chris Edwards explains:

The chart shows that the IRS has become a huge social welfare agency in recent decades. Handouts have soared from $4.4 billion in 1990 to an estimated $91.1 billion in 2013 (red line). Handouts are down a bit in recent years because some of the refundable credits from “stimulus” legislation have expired. IRS administration costs have grown from $7.7 billion in 1990 to an estimated $15.3 billion in 2013 (blue line). 

How should we reform the IRS budget? First, we should terminate the handout programs. That would save taxpayers more than $90 billion annually and cut the IRS budget by 86 percent. 

The largest IRS handout is the refundable part of the EITC, which is expected to cost $55 billion in 2013.

So true.  Considering that over $10 billion of the $55 billion is stolen or otherwise issued improperly, the EITC is a nightmare.  There would be plenty of funding available for tax administration if EITC could go away.

But the chart also shows something else: if the tax law was no more complicated than it was in 1990 — and believe me, it was plenty complicated — the IRS administrative budget would be adequate.  But with the IRS transformed into a monster multi-portfolio agency charged with healthcare administration, welfare, industrial policy, environmental enforcement, etc., etc., its budget is hopeless.

 

This will work out well:

This article examines the tax collection process to see how the IRS might enforce the individual mandate under the healthcare reform law. It concludes that resistant taxpayers can generally be forced to pay the tax penalty only if they are entitled to receive refundable tax credits that exceed their net federal tax liability. 

From Jordan BerryThe Not-So-Mandatory Individual Mandate, via the TaxProf.

 

Don’t trust the Tax Foundation?  Maybe you’ll trust the Congressional Budget Office.  A commenter yesterday took issue with a chart I reproduced showing not only the tax burden at different income levels, but the amount of government spending benefiting different income levels:

It’s not “the first chart for any tax policy debate,” it’s the last chart you should want to find on your side of the debate if you want to have any credibility.

If that doesn’t work for you, maybe this one from the CBO will be less objectionable:

cbo table

This chart is more focused on direct transfers, but it says pretty much the same thing.  It also covers 2006, and the tax law has hit the high end harder since then. (Via Greg Mankiw).

 

Scott Hodge, Andrew Lundeen,  54 Million Federal Tax Returns Had No Income Tax Liability in 2011 (Tax Policy Blog)

 

Paul Neiffer,  Sale of CRP Land – Is it Subject to the 3.8% Tax?  It depends a lot on whether an appeals court upholds the Tax Court Morehouse decision imposing self-employment tax on CRP income.  “And if the Morehouse case is overturned on appeal and the CRP is treated as rents, the land sale will also be subject to the 3.8% tax.”

 

Kay Bell, Tax tips for newlyweds saying “I do” on 11-12-13 or any day

Jack Townsend,  U.S. Banks File Long-Shot Litigation to Block FATCA Reciprocal Requirements

Leslie Book,  Disclosure and the 6-Year Statute of Limitation: S Corp Issues (Procedurally Taxing)

Jason Dinesen,  EAs are Partly to Blame for Our Obscurity  “Yes, we are treated as the red-headed stepchild of the tax world. But a big reason for this is that we ALLOW people to treat us this way.”

Russ Fox, Dan Walters with Another Example of California Dreamin’

 

TaxProf, The IRS Scandal, Day 188

 

Hope lives! 

It’s Time to Give Up on Tax Reform” – Joseph Thorndike, October 29, 2013

When Tax Reform Rises From the Dead, What Will It Look Like?Joseph Thorndike, November 12, 2013.

I should note that his vision of resurrected tax reform is hideous.  If that’s what hope for tax reform comes to, I’ll hope against his hope.

 

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Tax Roundup, 11/8/13: Kyle Orton gets the bad news about the Tax Fairy. And: how many Lithuanians can you fit into a mailbox?

Friday, November 8th, 2013 by Joe Kristan

tax fairyKyle Orton’s old lawyer fails to find the Tax Fairy, departs the tax business.  From a Department of Justice press release:

A federal court has permanently barred Gary J. Stern from promoting tax fraud schemes and from preparing related tax returns, the Justice Department announced today.  The civil injunction order, to which Stern consented without admitting the allegations against him, was entered by Judge Robert Gettleman of the U.S. District Court for the Northern District of Illinois.  The order permanently bars Stern from preparing various types of tax returns for individuals, estates and trusts, partnerships or corporations (IRS Forms 1040, 1041, 1065, and 1120), among others. 

According to the complaint, Stern designed at least three tax-fraud schemes that helped hundreds of customers falsely claim over $16 million in improper tax credits and avoid paying income tax on at least $3.4 million.  Stern allegedly promoted the schemes to customers, colleagues, and business associates.  The complaint alleges that his customers included lawyers, entrepreneurs and professional football players, and some of the latter, including NFL quarterback Kyle Orton, have sued Stern in connection with the tax scheme, alleging fraud, breach of fiduciary duty and professional malpractice. 

Mr. Stern seems to have led his clients on a merry chase after the Tax Fairy, the legendary sprite who can wave her wand and make your taxes disappear.  Kyle Orton is a graduate of Southeast Polk High School near Des Moines, where the truth about the Tax Fairy apparently was not in the syllabus.

Related: Jack Townsend, Chicago Lawyer Enjoined From Promoting Fraudulent Tax Schemes 

 

20131108-1Maybe Lithuanian apartments are crowded?  USA Today reports:

The Internal Revenue Service sent 655 tax refunds to a single address in Kaunas, Lithuania — failing to recognize that the refunds were likely part of an identity theft scheme. Another 343 tax refunds went to a single address in Shanghai, China.

Thousands more potentially fraudulent refunds — totaling millions of dollars — went to places in Bulgaria, Ireland and Canada in 2011.

In all, a report from the Treasury Inspector General for Tax Administration today found 1.5 million potentially fraudulent tax returns that went undetected by the IRS, costing taxpayers $3.2 billion.

When your controls don’t notice something like that, you have a lot more urgent problems than regulating preparers.   Yet Congress and the Administration think the IRS is ready to take on overseeing your health insurance purchases.  What could go wrong?

Tony Nitti is moved to offer the IRS a proposition:

MR. IRS,

REQUEST FOR URGENT BUSINESS RELATIONSHIP

FIRST, I MUST SOLICIT YOUR STRICTEST CONFIDENCE IN THIS TRANSACTION. THIS IS BY VIRTUE OF ITS NATURE AS BEING UTTERLY CONFIDENTIAL AND ‘TOP SECRET’.

Heh.

 

 

S-SidewalkCosting taxpayers by not taking their money.  Tax Analysts reports ($link):

Democrats seeking to raise revenue in ongoing budget talks have circulated a list of tax preferences they would like to see eliminated, including a provision that allows some wealthy individuals to avoid large payroll taxes, the carried interest preference, and the tax break for expenses businesses incur when moving operations overseas. 

The “provision that allows some wealthy individuals to avoid large payroll taxes” is called Subchapter S.  Form 1120-S K-1 income has never been subject to payroll or self-employment tax.  This bothers the congresscritters (my emphasis):

Commonly known as the “Newt Gingrich/John Edwards” loophole, it is most often used by owners of Subchapter S corporations to avoid the 3.9% Medicare tax on earnings, which costs taxpayers hundreds of millions of dollars every year.  Many S corporation shareholders receive both wages from the S corporation and a share of the S corporation’s profits, but they pay payroll tax only on their wages.

“Costs” taxpayers?  From my point of view, and from that of my S corporation clients, it saves taxpayers hundreds of millions of dollars every year — but keeps it out of the hands of grasping politicians, so it’s perceived as a bad thing, by grasping politicians.

The versions of this “loophole closer” proposed in the past have been lame.  When all they have to offer on tax policy is warmed over lameness like these, they aren’t serious.

 

 

TaxProf, Brunson: Preventing IRS Abuse of the Tax System.  The TaxProf quotes a new article by Samuel D. Brunson:

The IRS can act in ways that violate both the letter and the intent of the tax law. Where such violations either provide benefits to select groups of taxpayers without directly harming others, or where the harm to taxpayers is de minimis, nobody has the ability or incentive to challenge the IRS and require it to enforce the tax law as written.

Congress could control the IRS’s abuse of the tax law. Using insights from the literature of administrative oversight, this Article proposes that Congress provide standing on third parties to challenge IRS actions. If properly designed and implemented, such “fire-alarm oversight” would permit oversight at a significantly lower cost than creating another oversight board. At the same time, it would be more effective at finding and responding to IRS abuse of the tax system and would generally preserve the IRS’s administrative discretion in deciding how to enforce the tax law.

Right now the IRS — and by extension the administration in power — can pick and choose what parts of the law it wants to apply.  For example, the current administration has chosen to allow tax credits for participants in federal insurance exchanges, which the law does not authorize, while unilaterally delaying the employer insurance mandate but not the individual mandate.  Somebody should be able to challenge this sort of fiat government.

 

More on the shutdown of Instant Tax Service, a story we covered yesterday:Irwin

Department of Justice press release: Federal Court in Ohio Shuts Down Nation’s Fourth-Largest Tax-Preparation Firm and Bars CEO from Tax-Preparation Business

 

Irwinirwin.jpgPeter Reilly, Ninth Circuit Rules Against Irwin Schiff Sentence Appeal:

Irwin Schiff is probably one of the more famous alternate tax thinkers.  His seminal work “How Anyone Can Stop Paying Income Taxes” is available in hardcover on Amazon for one cent.

Mr. Schiff appealed his sentence on tax crimes on the basis that his attorney failed to raise a “bipolar disorder” defense and what an attorney I know calls the “good faith fraud” defense — the Cheek argument that you really thought the wacky stuff you were saying is true.  Peter wisely notes:

The problem with the Cheek defense is that you have to be smart to raise it, but if you show that you are too smart, then it does not work.

Its a fine line — smart enough to spend “thousands of hours” researching the tax law, but not smart enough to avoid a massive misunderstanding of it.

 

Jana Luttenegger,  IRS Change to Use-Or-Lose Rule for FSA Accounts (Davis Brown Tax Law Blog): “New IRS rules permit employers to allow participants in a health Flexible Spending Arrangement (FSA) to carry over unused amounts up to $500 from one plan year to the next.”

 

Paul Neiffer, Trusts Get Hit with New 3.8% Tax too. And hard.

Kay Bell, It could be time to harvest capital gains and future tax savings

Rush Nigut,  Careful Planning Necessary When Using Retirement Monies to Fund Startup Business

Brian Strahle, IGNORANCE MAY NOT BE BLISS WHEN IT COMES TO ‘ZAPPERS’  These are software apps designed to hide point-of-sale receipts from the taxman.

Phil Hodgen’s Exit Tax Book: Chapter 9 – Estate and Gift Tax for the Covered Expatriate

Catch your Friday Buzz with Robert D. Flach!

TaxGrrrl,  Former NFL Star Cites Concussions, Receives Prison Sentence For Role In Tax Fraud 

Leslie Book,  TIGTA Report on VITA Errors (Procedurally Taxing)

 

Howard Gleckman,  Can Expiring Tax Provisions Save the Budget Talks? (TaxVox).  “Sadly, it is hard to see how.”

 

Not strictly tax-related, but good reading anyway:  How to Put the Brakes on Consumers’ Debt(Megan McArdle).  Megan points out the wisdom of spending less than you take in, in preference to trying to get the government to cover your shortfalls.

 

News you can use: 3 ways to screw up your next website (Josh Larson at IowaBiz.com)

News from the Profession: Failed PwC Auditor Finds Success in Burning Bridges With This Ridiculous Farewell Email (Going Concern)

 

Quick thinking.  From The Des Moines Register:

A Des Moines man awoke to find a stranger in his living room Thursday afternoon, police said. When the victim confronted the burglar, the suspect reportedly offered to mow the victim’s lawn for $5.

Guy needs to work on his pricing model.

 

 

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Tax Roundup, 11/5/13: IRS makes audits even more fun. And: the 400!.

Tuesday, November 5th, 2013 by Joe Kristan

20080306-2.jpg

It’s not the same people every year.  High Income, Low Taxes and Never a Bad Year (James B. Stewart, New York Times, via the TaxProf.  A New York Times columnist comes through with all of the cliches about “the rich” in one column.

 Plenty of people did get hit in 2009, including people at the very top. But all things are relative. The fortunate 400 people with the highest adjusted gross incomes still made, on average, $202 million each in 2009, according to Internal Revenue Service data. And this doesn’t even count income that doesn’t show up as adjusted gross income, such as tax-exempt interest.

Yet the top 400 paid an average federal income tax rate of less than 20 percent, far lower than the top rate of 35 percent then in effect.

They also paid a lower rate than the top 1 percent, which were people with adjusted gross incomes in 2009 of at least $344,000. These affluent but hardly superrich taxpayers paid on average just over 24 percent of their adjusted gross income in federal income tax. Even the top 0.01 percent, people earning at least $1.4 million, paid 24 percent.        

You’d get the impression that this is the same top 400 every year, paying low taxes as they go.  That’s a wrong impression.

Most people who have spectacular incomes do so only once, usually because they sell their business or take it public.  That normally is how you hit that top 400.  Yet the “never a bad year” line implies that they have this kind of income year after year.

That income is capital gains, which are taxed at a lower rate.  That’s no mystery or conspiracy, that’s just math.

Furthermore, those capital gains are often one of two taxes on the income.  C corporation income is taxed twice — first on the corporation tax return, and again when retained earnings are distributed as dividends or recovered as capital gains.  And to the extent the capital gains reflect inflation, they are aren’t a tax on income at all; they are a confiscation of principal.

Mr. Stewart is rehashing numbers from 2009, when the top federal rate on capital gains was 15%.  It was increased for 2013 to 23.8%, nearly a 60% increase.   Yet because ordinary income rates went up too, the Famous 400 will always have lower rates, and Mr. Stewart will be able to write the same lame column five years from now.

Of course, many economists think that capital gain rates were too high even before the rate increase.  But maybe that’s true only unless it really matters.


20130419-1The IRS has figured out a way to make audits even more fun!  Tax Analysts reports ($link) “The IRS Large Business and International Division on November 4 released mandatory, stringent new procedures for enforcing information document requests (IDRs) and issuing summonses, allowing examiners almost no discretion even at the manager level.”

The new procedure requires the IRS to issue a summons on a tight deadline when an “information document request” (IDR) isn’t promptly met:

If the IDR response remains incomplete by the delinquency notice deadline, the examiner is required — again without exception — to issue a pre-summons letter within 14 calendar days of the delinquency notice deadline. The pre-summons letter sets another new deadline, which can’t be more than 10 calendar days away unless the director of field operations grants approval.

Former IRS official Larry Langdon warns:

Taxpayers who may have trouble meeting proposed deadlines in a draft IDR “need to immediately escalate that draft IDR before it goes final, because in effect if it goes final, they’re stuck with those dates,” Langdon said. At that point, he added, no amount of negotiation will stop the new enforcement process from proceeding.

Lovely.  Of course the IRS won’t stop conducting audits during busy season, or during client reporting deadline periods, but that’s just too bad, apparently.

Link: LB&I-04-1113-009.

 

Paul Neiffer,  Everything You Want to Know About Net Investment Income Tax (or Not)

If you have 1,000 acres of good farmland, it only takes $250 per acre cash rent to put you over the threshold.  Then, after a few years of cash renting, the farmer elects to sell his farmland.  In this case, almost all of the gain will be both subject to the 3.8% net investment income tax and the 20% maximum federal tax plus state income taxes.

But that year the farmer will be “rich,” so he’s fair game, right?

 

Jason Dinesen, Nebraska Tax Guidance for Same-Sex Married Couples   

William Perez, Estate and Gift Tax Figures for 2014

 

Russ Fox, The Wrong Kind of Education Leads to ClubFed

 A California tax preparer decided he wanted to increase refunds for his clients. There’s absolutely nothing wrong with that–I want my clients to get the maximum possible refund allowed under the law. It appears that Kenyon Williams forgot those last three words; he was found guilty of two counts of wire fraud and two counts of aggravated identity theft earlier today.

That “under the law” thing gets in the way of so many great ideas…

 

TaxGrrrl, Saying ‘I Do’ To Tax Planning   What the tax-savvy bride is wearing, and when.

Andrew Lundeen, Scott Hodge, Individuals Receive 91 Percent of Tax Expenditures (Tax Policy Blog):

20131105-1

 

Tax Justice Blog, More Illinois Companies Trying to Extort Tax Breaks.  Given Illinois’ newly-increased taxes, it’s partly self-defense, but you can bet they’re shaking down Iowa too.

Donald Marron, Time to Fix the Budget Process (TaxVox)

 

tack shelterJeremy Scott, What the Daugerdas Verdict Means for Tax Shelter Promotion (Tax Analysts Blog):

While it might have secured a few convictions, and even jail time, in the KPMG and Daugerdas cases, it also lost face, along with time and resources, for its relatively modest success. Instead of spending many years to secure partial convictions on a few practitioners, perhaps the government’s time would be better spent attacking tax shelter transactions on the front end, at the exam and regulatory drafting levels.

If tax planning and compliance get you prosecuted, you’ll have a hard time getting people to perform tax planning and compliance.

 

Phil Hodgen’s Exit Tax Book: Chapter 6 – Taxation of Specified Tax-Deferred Accounts

Jack Townsend,  India Signs OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters.  Bank secrecy isn’t.

 

Peter Reilly,  SPLC Calls Family Research Council Hate Group – Should IRS Take Action?  I think SPLC has done quite enough for the FRC already, thank you.  Peter wisely notes “The IRS teaming up with the FBI to identify hate groups does not sound like a confidence inspiring plan to me.”

Carnival Time at Kay Bell’s Place!  Tax Carnival #122: Return to Standard Tax Time

 

Things you didn’t learn in Geography Class: Ireland Is a Bagel (Martin Sullivan, Tax Analysts Blog)

 

News From the Profession: Guess Which Big 4 Firm Allegedly Just Punked Its Rejectees (Going Concern).  When I was interviewing out of school, I knew one visit went badly when they sent me a bill for my hotel room.

 

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Tax Roundup, 10/23/2013: The Earned income tax credit thief subsidy feature. And: tax season delayed!

Wednesday, October 23rd, 2013 by Joe Kristan

Some smart people are big fans of the Earned Income Tax Credit. Some see it as a way to help the working poor, and some see it as a less destructive way to achieve the goals of minimum wages.

Yesterday the Treasury Inspector General for Tax Administration reported that from 21% to 25% of the earned income credit was paid improperly for the most recent fiscal year, and that $110 to $130 billion has been “paid improperly” over the past decade. That’s a nice way of saying “stolen.”

 

EITC error chart

Just because there is a lot of theft doesn’t by itself make a program bad — though that kind of loss rate would bankrupt anybody in the private sector.   Most people would send food to starving people in a war zone knowing that local warlords will be plundering some of it. But a program that comes at the cost of sending $11 billion annually to thieves needs to otherwise be a very good thing.   That’s not so clear with the EITC.

The credit does help the working poor — as long as they stay poor. As they work their way out of poverty, it becomes a trap. The phase-out of the credit imposes a punishing unstated, but very real, marginal tax rate.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC as a poverty trap: phaseouts of the benefit impose stiff marginal tax rates on the working poor.

The EITC is only one program that does this; all “means-tested” welfare programs do this to some degree. It’s not uncommon for this implicit tax rate to exceed 100% at some income levels.

I don’t know what the right answer is (Arnold Kling has some ideas), but increasing the EITC, like Iowa did this year, isn’t it.

 

Oh, Goody. 2014 Tax Season to Start Later Following Government Closure; IRS Sees Heavy Demand As Operations Resume (IRS Press Release)

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4. 

20131023-1It’s funny how programming IRS computers isn’t “essential,” but barricading open-air monuments is.

Other coverage:

William Perez, IRS Expects to Delay the Start of the 2014 Filing Season

Kay Bell, IRS won’t accept 2013 tax returns until Jan. 28, 2014

Russ Fox, Sigh: 2014 Tax Season to be Delayed up to Two Weeks

TaxGrrrl, IRS Announces Delayed Start To 2014 Tax Season   

 

Robert D. Flach, HOW TO DEAL WITH THE IRS AND LIVE TO FIGHT ANOTHER DAY

Paul Neiffer,  Taxpayers Want Their Cake, Frosting and Candles! Live by the low estate-tax value, die by the low estate-tax value.

Jack Townsend, Has the U.S. Aided International Tax Evasion?

Russ Fox,  Coming Attractions: When the IRS Writes New Law When They’re Not Allowed To.  A federal judge has allowed a suit challenging the IRS unilaterally extending the tax credit for insurance purchased on state-sponsored exchanges to policies sold on federally-run exchanges.

TaxProf, The IRS Scandal, Day 167

 

President Reagan signs PL 99-514, the Tax Reform Act of 1986.The Tax Policy Blog takes us on a nostalgia tour in  8 Technological Changes Since the 1986 Tax Reform.  Take a trip back to the days of “car phones.”

 

Clint Stretch, Whom Do Tax Reformers Want to Help? (Tax Analysts Blog):

When congressional leaders start talking about tax reform as if it will benefit everyone, someone should be asking: Whom are you trying to help? The answer may be Americans earning more than around $75,000 who have fewer itemized deductions, fewer kids, fewer healthcare benefits, and lower retirement savings than most.

I’m not convinced that’s the right way to look at it.  Getting rid of complexity and lowering rates helps everybody by eliminating dead weight loss and redirecting resources from tax planning and compliance to more useful pursuits.

Andrew Lundeen, A Lot Has Changed in the 27 Years Since the Last Major Tax Reform (Tax Policy Blog).  “The amount of credits, loopholes, and deductions has increase by 44 percent, from $844 billion (2013 dollars), to over $1.2 trillion (2013 dollars), with much of that growth coming from the expansion of refundable tax credits.”

 

Howard Gleckman, Congress Shouldn’t Forget About Tax Entitlements In Its Search for Deficit Reduction (TaxVox)

 

Tax Justice Blog,  Governor Scott Walker Appropriates State Budget Surplus for Campaign Season Tax Cut.  In Tax Justice World, returning money taken by force of law to the taxpayers is “appropriating” it.

 

David Brunori, Eliminating the Sales Tax Is a Very Good Idea (Tax Analysts Blog) “But ending a tax that preys on the poor and is increasingly difficult to collect may provide the economic boost Rhode Island needs.”

Brian Strahle, BLAMING THE PLAYERS FOR THE RULES.  “Regardless, most taxpayers are simply trying to comply with the maze and complexity of non-uniform multistate tax laws”

Joseph Thorndike, The Gas Tax Doesn’t Work Because Politicians Broke It (Tax Analysts Blog).  By not raising it, apparently.

 

The Critical Question:  JD Salinger – Was January 27 2010 A Good Day To Die ?  (Peter Reilly)

Career Corner.  First Round Interview Tips for This Fall’s Accounting Recruits (Going Concern)

 

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