In its usual last-minute frenzy, the Iowa General Assembly passed a bill (HF 625) to extend the popular School Tuition Organization credit. The credit is 65% of the amount contributed to organizations that subsidize private elementary and secondary tuition. When combined with the federal tax deduction for the donation, there is very little out-of-pocket cost for the donations. The amount of the credit is limited, so it has been oversubscribed in recent years. the bill increases the cap starting in 2013.
The bill has a surprising amendment that passed yesterday: it now creates “affiliate nexus” in Iowa (my emphasis):
(1) A retailer shall be presumed to be maintaining a place of business in this state, as defined in paragraph “a”, if any person that has substantial nexus in this state, other than a person acting in its capacity as a common carrier, does any of the following: (a) Sells a similar line of products as the retailer and does so under the same or similar business name. (b) Maintains an office, distribution facility, warehouse, storage place, or similar place of business in this state to facilitate the delivery of property or services sold by the retailer to the retailer’s customers. (c) Uses trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the retailer. (d) Delivers, installs, assembles, or performs maintenance services for the retailer’s customers. (e) Facilitates the retailer’s delivery of property to customers in this state by allowing the retailer’s customers to take delivery of property sold by the retailer at an office, distribution facility, warehouse, storage place, or similar place of business maintained by the person in this state. (f) Conducts any other activities in this state that are significantly associated with the retailer’s ability to establish and maintain a market in this state for the retailer’s sales. (2) The presumption established in this paragraph may be rebutted by a showing of proof that the person’s activities in this state are not significantly associated with the retailer’s ability to establish or maintain a market in this state for the retailer’s sales.
This ratifies the aggressive approach of the Iowa Department of Revenue on intangible nexus, and will likely trigger more audits of out of state companies. The Supreme Court and Congress really need to either reaffirm the Quill decision or set new rules.
The IRS is broken, that’s for sure. But the IRS is a symptom. The “disease” is the tax code. I think that’s absolutely right. And for me, this latest “scandal” concerning the IRS is going to make it impossible to reform our tax code anytime soon.
Politicians advance plan to allow politicians to give more tax money to private businesses. From TheGazette.com:
Iowa communities would be able to designate special 25-acre development zones and use a share of sales tax and hotel-motel tax revenues to assist private projects of at least $10 million under legislation that’s getting bipartisan support.
House File 641 would establish reinvestment districts designed to spur development of “big ideas,” said Sen. Matt McCoy, D-Des Moines, who led a Senate Ways and Means subcommittee that revamped the bill representatives approved 87-9 last month.
This is, of course, an awful idea. Politicians are notoriously bad at allocating investment capital, and they tend to make sure it goes to their cronies and contributors. But when the state’s Governor, a member of the purported small government party, does an end-zone dance over a giant federal subsidy to a private utility controlled by a billionaire, the battlefield is left to the crony capitalists. The House version of HF 641 passed 87-9.
New York State’s comptroller says giving $2.8 billion in tax breaks over five years added more than a million jobs, which would be great news except that the state lost jobs.
I’m confident Iowa’s job-creating tax breaks work just as well.
For capital gains, the current law is already out-of-step with international standards. After the fiscal cliff, combined state and federal capital gains rates increased from 19.1 percent to 28 percent. This is more than 10 percentage points higher than the international average. One suggestion, of course, is to tax capital gains at the rate at the 1986 rate of 28 percent. This would push America’s average combined federal and state capital gains rate to more than 35 percent, more than double the international average.
A chance traffic stop on I-75 in Lee County uncovers a massive tax fraud scheme. Deputies say the woman accused used her job to steal personal information – even stealing from people who were dead.
Thursday, 23-year-old Tequila Gordon was sitting in the Lee County Jail. Her bond was set at $72,000.
Prosecutors say she worked at liberty tax services in 2009 and stole personal information from dozens of people.
I would think having a first name of “Tequila” would make getting a good job challenging. It won’t be any easier now.
Search for the Tax Fairy leads to federal prison. The Tax Fairy, in the imagination of believers, appears in the form of magical legal maneuvers that make your taxes all go away. Your drinking buddies may even claim to have seen it, or that their tax guy knows her.
It can hurt when you find that there is no Tax Fairy. It must hurt for one South Dakota surgeon. From RapidCityJournal.com:
Friends and family described Dr. Edward Picardi as a compassionate, highly skilled surgeon, but the accolades failed to spare the doctor a five-year prison sentence for income tax evasion on Tuesday.
Despite the good the Sturgis man was proclaimed to have done in his life, Picardi, 56, is the same man a federal jury convicted of 13 felonies last October, U.S. Chief District Judge Jeffrey Viken said when he sentenced the doctor.
Picardi was charged with income tax evasion after an exhaustive federal investigation of his financial practices spanning 10 years from 1999 through 2009. He used an elaborate network of dummy corporations and several foreign banks to divert thousands of dollars in income.
The indictment says the scheme was hatched with the aid of a Maryland attorney who set up a phony employee leasing scheme to suck taxable income to shell companies, which the surgeon tapped for cash as needed. This worked fine, until one day it didn’t, and now it’s a five-year unpaid vacation, plus tax, interest and penalties.
There is no Tax Fairy.
Jana Luttenegger, Disclaiming an Inheritance (Davis Brown Tax Law Blog). Sometimes it’s better estate planning to turn down an inheritance and let it go to your kids or some other beneficiary. But you have to do it right:
Most importantly, the disclaimer must be made before you accept any benefit in the gift, and it must be an unqualified disclaimer. (No, you can’t have a party at the house and then decide you don’t want it.) Once the disclaimer is made, it is irrevocable — you can’t change your mind. If you properly disclaim, the property will pass as if you predeceased (you do not get to direct where the property goes).
The looming debate over the federal debt limit is a depressing reminder that we’re living in the Age of the Manufactured Crisis. And it encourages a sort of political nostalgia – a yearning for that bygone era when tough lawmakers made the tough decisions that kept federal debt at manageable levels. Well, sorry to tell you, but there were never any fiscal heroes.
Just politicians who show by their actions that they are happy to spend us to Greece.
Jason Dinesen, Same-Sex Marriage, Community Property, And Multi-State Income — Part 1. ”Indeed, some of the most complicated tax returns I’ve ever prepared have been for same-sex couples that moved from California (a community property state) to Iowa (not a community property state) during the middle of the year.”
Think of it as the ballpark program you pick up before a baseball game. You can watch the game without it, but it is much more fun if you can keep score and know a little something about who plays for the visiting team.
Except much less interesting than baseball, and the players are uglier and less skilled.
David Brunori doesn’t think much of the tax wisdom of the Iowa House of Representatives ($link):
The Iowa House of Representatives recently passed the Iowa Reinvestment Act, which would allow companies to keep sales tax revenue they collect rather than turning it over to the general fund as the citizens think will happen. Basically, the act is designed to allow businesses to recoup the cost of development. The state has done that before to allow the public to help finance a speedway and other projects that apparently can’t be justified in the free market. The vote for that abomination of tax policy was 87 to 9. That’s what we call bipartisan bad tax policy.
Just more of using your money to subsidize the well-lobbied and well-connected.
The idea of the IRS preparing individuals’ returns is a classic example of a theory that cannot survive in a practical world. Like most theories, it deserved an experiment. It had that chance, in California, and it failed, with only a tiny portion of the eligible population deciding to participate.
Making taxpayers’ lives easier is a matter of simplifying the tax law, not enabling the complexities by turning tax preparation over to the IRS.
This strikes me as wise. I just can’t imagine IRS data processing ever making this possible, considering the complexity of the income tax and the way Congress changes it all the time.
On one hand, $3.4 million is a lot of money — nobody should doubt that. But we’re also nearly completely blind in America to how much is “enough” for retirement. Many people would say the word “millionaire” and imagine Uncle Pennybags or Uncle Scrooge. But consider this: If you wanted to get $40,000 a year in retirement income and do it just on interest payments alone (in other words, if you were trying to avoid taking anything out of your nest egg and just live on the interest), then if you had your money in “safe” 10-year Treasuries earning 1.78%, then you’d have to have more than $2.2 million in the bank. Under those conditions, “rich” doesn’t really look so rich anymore.
I don’t think the nation’s biggest problem is people saving too much.
Holding your breath for tax reform? Exhale. Martin Sullivan says tax reform is on the Fast Track to Nowhere. (Tax.com)
We have written several times about the dangers of nontraded or thinly traded REITs. They are a popular way of investing in real estate but they can be difficult to sell or liquidate if an investor suddenly needs cash.
I saw an elderly, ill client with severe cash problems while holding a private REIT investment that he couldn’t cash out. This really does happen. This is not a problem with widely-traded REITs, which are as liquid as any stock.
Jim Maule, Why the “Toss Tax Records After Three (or Seven) Years” Advice is Bad. I never throw away tax returns, and you need to keep records to support the cost of shares and big assets. If you have loss carryforwards, you need to keep the records that support the losses as long as you are using the carryforwards.
Potassium forever? An accused embezzler apparently was in no hurry to stand trial. From StarTribune.com:
A Texas man faces more than 16 years in federal prison for his role in a scheme to bilk nearly $400,000 from his former Eagan employer, Advantage Transportation.
Clayton “Craig” Hogeland, 43, also obstructed justice by faking a life-threatening medical condition, U.S. District Judge Patrick Schiltz found. That caused delays for both his trial and sentencing hearing.
How did he delay his trial?
Further health-related delays stretched out the trial before his conviction on Dec. 6, 2011. He was placed in custody Jan. 8, 2013, and the erratic blood potassium readings stopped. Six days later, his wife reported to federal authorities that she found in his belongings four zip-top bags of what turned out to be potassium chloride.
Despite his continuing complaints about symptoms after being jailed, tests revealed no abnormal blood potassium levels, the prosecution said.
I’m not sure this was well thought-out. What’s the next move? More potassium? Maybe when you are looking at 16 years in federal prison, delay is its own reward.
California CPA Lowell Baisden came east to North Platte, Nebraska, to do tax work for some doctors. It hasn’t gone well, as his current mailing address indicates. Yet he’s still fighting, if not successfully. The Federal Appeals Court for the Eighth Circuit last week rejected an appeal to his 37-month sentence.
Mr. Baisden argued that he suffered from bad legal advice from his attorney, Mr. Vanderslice:
According to Baisden, he had made it clear to Vanderslice that he wanted to plead guilty to a non-tax related crime so that he could keep his CPA license. Baisden also contended that Vanderslice failed to advise him that he would be responsible for a tax loss of more than $1.5 million, an amount that necessitated incarceration. Baisden further argued that he did not feel responsible for the full amount of the tax loss asserted by the government.
If Mr. Baisden didn’t think he might go to prison, he might have bought a copy of the North Platte Bulletin, which reported at the time: “He faces up to five years in prison and $250,000 in fines.”
Mr. Baisden also said that his attorney should have taken his legal advice:
Baisden also stated that he had provided an extensive analysis of his case to Vanderslice and provided tactical advice, which Vanderslice ignored.
Considering what has happened to some folks who took advice from Mr. Baisden, it’s hard to fault Mr. Vanderslice.
The court said that Mr. Baisden had signed off on the plea deal:
Baisden, a CPA, clearly stated during the plea agreement and in open court during a colloquy with the district court that he had thoroughly discussed his case with his counsel, was satisfied with the job his counsel had done, and that no one had made any promises of leniency in exchange for his guilty plea. Furthermore, the plea agreement outlined the charge to which Baisden was pleading, the possible sentence, and was signed by Baisden, his counsel, and the Assistant United States Attorney.
The Moral? If you don’t like the plea deal, there’s not much you can do about it once you sign it. And if a new tax guy comes to town with all sorts of great new tax ideas that no other tax guys in town aren’t willing to go along with, it’s possible that the other guys have their reasons.
The tax, which took effect Jan. 1, applies to the “net investment income” of married joint filers who have more than $250,000 of income (or $200,000 for singles). Only investment income—such as dividends, interest and capital gains—above the thresholds is taxed. The rate is a flat 3.8% in addition to other taxes owed.
“Affluent investors who ignore this tax will be in for a total shock next April 15,” says David Lifson, a certified public accountant specializing in tax at Crowe Horwath in New York. Such income is typically not subject to withholding, and people won’t be factoring it into their estimated taxes. Lower-bracket taxpayers who receive a windfall large enough to owe the tax will also be in for a surprise.
This tax is shockingly complex, and it will surprise a lot of taxpayers next April.
Feds sue over Des Moines utility tax (Des Moines Register). Des Moines lost a long legal battle over its “utility tax” on electric bills. Now the federal government is after the city:
Federal prosecutors acting on behalf of the U.S. Department of Veteran Affairs sued the city of Des Moines and MidAmerican Energy Co. on Friday, alleging that the city’s longstanding surcharge on gas and electric customers in Des Moines constitutes an illegal tax when levied against Uncle Sam.
When a taxpayer wins a jackpot, the casino gives them the W-2G for the win at that time. It’s up to the taxpayer to keep the W-2G safe and bring it into me, or their preparer, when their taxes are done. What happens to the W-2G? It gets shoved into a purse or pocket, thrown in the glove compartment or on the desk at home or thrown in the trash by accident.
I support keeping the deduction for acquisition debt mortgage interest on one’s primary personal residence, and the deduction for real estate taxes on the same primary personal residence, not to encourage home ownership, but as a form of “geographical equalization”.
In other words, he wants to help out people who live in places where houses cost more. I think that’s misguided, as it also encourages people who live in low-cost locales like Des Moines to build palaces with help from the taxman.
Russ Fox, 1700 Miles and a 7% Difference. Joe Mauer of the Minnesota Twins tries to avoid Minnesota residency for low-tax Florida. It went about as well as this season will for the Florida Marlins (or the Twins, for that matter).
Paul Neiffer, Don’t Forget Your Retirement Plan. “I was talking with a new farm client the other day about his estate plan and what struck me the most was not how much farm land value he had accumulated but rather the amount he had tucked away into his retirement plans.”
Get some competent advice about how to handle the past years. If the advice is OVDI, then stand up and walk away, swearing the mightiest oaths that a drunken sailor could swear.
Perhaps the Offshore Voluntary Disclosure Initiative has somehow failed to gain the confidence of the tax bar?
Absolutely stunning and wonderful news out of Florida in a highly-publicized offshore account case. From the Palm Beach Daily News:
U.S. District Judge Kenneth Ryskamp sentenced Mary Estelle Curran of Palm Beach to one year probation Thursday on tax charges, before revoking the sentence five seconds later and sending her out of the courtroom a free woman.
Ryskamp chastised the government for prosecuting the 79-year-old woman when 38,000 other people in the same situation were given immunity.
The woman had inherited Swiss bank accounts from her wealthy husband. Her lawyer had tried to get her into the offshore disclosure program, but the IRS turned her down because her name was on a list provided by Swiss bank UBS. She pleaded guilty to two false return charges. The judge blasted the government for bringing criminal charges:
Based on these facts, did it ever occur to the government to dismiss these charges,” Ryskamp said. “Instead, the government decided it had to make a felon out of this woman?”
Mark Daly, from the Department of Justice Tax Division, told Ryskamp that Curran’s husband, Mortimer, was a “very wealthy man” and shouldn’t have turned to a foreign national for an interpretation of U.S. Law.”
Mortimer is beyond the prosecutors’ reach, so burn the widow! In addition to setting her free, the judge urged her to apply for a presidential pardon, which he promised to endorse.
24 current and former employees of the Internal Revenue Service have been charged for crimes relating to fraudulently obtaining more than $250,000 in government benefits. Thirteen of the current and former IRS employees have been charged federally with making false statements to obtain unemployment insurance payments, food stamps, welfare, and housing vouchers. All thirteen, individually charged in separate indictments, are alleged to have falsely stated that they were unemployed while applying for or recertifying those government benefits.
They may have been right about being unemployed, just wrong about the timing.
The headline producing data in the report was that revenue loss – about $181 billion – from corporate tax expenditures in 2011 was “approximately the same size as the amount of corporate income tax revenue the federal government collected that year.” That makes a headline grabber; here would be my version: “Corporations Got More in Tax Breaks Than They Paid in Taxes, Government Says.”
It’s almost like the tax exists only so the politicians can carve loopholes for their friends.
Kyle Pomerleau, TPC, What About the “Pass-Throughs?”. (Tax Policy Blog). Measuring business taxes needs to look beyond corporation taxes when most businesses are taxed on 1040s.
David Cay Johnston, Promises, Promises(Tax.com). “Candidate Obama promised in 2008 to reform the Alternative Minimum Tax, and President Obama promised at least an honest accounting in his first budget, but his proposed budget for Fiscal 2014 is silent on the issue.”
Iowa Senate Republicans advance income tax plan. TheGazette.com reports:
Sen. Randy Feenstra, R-Hull, said all 24 minority Senate Republicans have signed onto a proposal to significantly lower state personal income tax rates and simplify the Iowa tax code by offering a two-pronged approach that would eliminate federal deductibility and benefit most Iowans.
…
The Hull Republican said the proposed new tax structure would flatten the current nine income tax brackets into three, elimination of federal deductibility as a competitive impediment, enhance the current standard deduction for all taxpayers and provide an extra boost for blind, elderly and dependent Iowans, eliminate itemized deduction, increase personal exemption credits, and raise filing thresholds.
So far I have been unable to find the bill (though it being April 11, I’m not going to spend a lot of time looking for it today). As Senate Republicans have no chance of advancing a bill in the face of majority Democratic opposition, it’s really a gesture. Still, it’s nice to see that income tax reform remains alive, in spite of the Governor’s indifference this year. It’s also nice to see that the insistence on keeping the deduction for federal taxes is eroding. Much better to build it into a lower rate.
This is a bit weird given that President Obama rides on what is essentially the nicest corporate jet in the world. To be fair, the President is quite right that companies do not need a tax break to buy corporate jets. But since they don’t really get a tax break for buying corporate jets, we probably don’t need to spend this much valuable presidential time worrying about this non-problem.
Anything to make life difficult for a high-tech U.S. manufacturer. As long as the President continues to beat dead horses like this and the “Buffett Rule,” we know he is not at all serious.
Sure, Democrats pay lip-service to infrastructure, education, and the like. But for the most part, they are profoundly unwilling to make a wholistic case for activist, progressive government.
Actually, they probably wouldn’t get very far making the case honestly.
Flickr image by Samat Jain under Creative Commons license
Should we just get a bill from the IRS, instead of filing returns? That’s something Janet Novack seems to be thinking about. She has two guest posts on the issue:
Some people fear return-free filing will separate citizens further from the costs of government. I think that is caused by an income tax that now is effectively only on high-income earners. When 51% can send the bill to the other 49%, bad policy seems inevitable.
It makes me wonder: if there are “Errors to avoid,” are there errors we should seek out, or at least not sweat? I can’t think of errors I’d want to make on a tax return, but I can think of some that I wouldn’t lose sleep over:
1. Forgetting to check the “presidential election campaign fund” box. After all, your entire tax bill is basically the federal election campaign fund.
2. Misspelling the name of a stock on Schedule D.
3. Writing a “smiley face” next to the tax refund line.
4. Forgetting to update your “occupation” on the signature line when you change jobs.
The core problem is that the IRS cannot look into the hearts of companies and see which of them really needs to provide free lunch to their employees in order to have a healthy, vibrant company, and which of them is doing this in order to provide a tax-free boon to their workers.
In case anyone asks, donuts are critical to a healthy, vibrant tax practice.
So a Blonde and a lawyer walk into Tax Court. She loses.
No, the Tax Court has not started to report petitioner hair color in its decisions, along with the names of the attorneys and the resident state (“petitioner resided in Iowa and was brunette during the tax years at issue but gray at trial”). This taxpayer’s first name is actually Blonde. And she was an attorney, at least until 2006, when she pleaded guilty to failure to file tax returns. From the Tax Court:
Since the only issue currently before the Court is whether Blonde Grayson Hall signed the Form 4549 under duress we will refer to Blonde Grayson Hall as petitioner.
Petitioner attended the University of Michigan Law School and was admitted to practice law in 1982. Petitioner was the chief executive officer of Hall & Associates, LLC, a law firm in Philadelphia, Pennsylvania, from 1995 to 2006.
As part of her plea deal, the taxpayer filed Form 4549 agreeing to assessment of additional tax liabilities for several tax years. She apparently had second thoughts:
Thus, the issue before us is whether Blonde Grayson Hall should be relieved of her agreement in the Form 4549 because it was signed under duress.
Of course, duress is what a plea deal is all about. You accept a bitter pill because you think it could get a lot worse if you go to trial. While this is a fearsome and sometimes abused weapon in the hands of prosecutors, the Tax Court said it wasn’t the kind of duress that makes the Form 4549 go away (my emphasis):
The requirement that petitioner sign the Form 4549 stems from the Government’s efforts to prosecute her for admittedly criminal conduct and to collect taxes and penalties. No doubt, given the circumstances, these efforts were zealous and disadvantageous to petitioner. However, every criminal defendant who is offered a plea agreement faces an equally unpalatable decision — accept a legally authorized plea agreement that will include terms disadvantageous to the criminal defendant or go to trial which may result in significantly worse consequences for the criminal defendant. This unpalatable decision does not constitute duress or involuntariness.
The taxpayer is stuck with the Form 4549 that she signed.
The moral: If you plead guilty to criminal tax charges, it is very hard to fight the assessment for the years covered by the plea. Even if you are a lawyer, and even if you are Blonde.
Under standard, pretty flexible assumptions, it’s impossible to tax capitalists, give the money to workers, and raise the total long-run income of workers.
Not, hard, not inefficient, not socially wasteful, not immoral: Impossible.
Yet the effort to do so never ends. Nor the harm it causes.
The Internal Revenue Service is currently without a Commissioner. Douglas Shulman, the 47th IRS Commissioner stepped down last November.And from what I’m starting to hear, the IRS may not have a new Commissioner for as long as close to two years. That is not a good thing.
David Cay Johnston, Unkind to Charity(Tax.com) “The tax rules on charities, both the many good and the few bad, are about to get much more anti-giving.”
According to this report, dozens of people supporting a bill to repeal a state sales tax on amounts charged by dance establishments decided to dance in protest. According to the report, the protestors demonstrated the salsa, the flamenco, the tango, and even a conga line. Considering the speed with which legislatures get things done, perhaps they engaged in some slow dancing, though the report does not mention it.
Tax Freedom Day for Iowans will arrive April 9, according to the Tax Foundation. That’s nine days sooner than for the whole country. From the Tax Policy Blog:
Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A vivid, calendar-based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation’s income.
In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 108 days, or 29.4 percent, into the year. Americans will spend more in taxes in 2013 than they will on food, housing, and clothing combined.
You can find Tax Freedom Day for your state from this Tax Foundation Map:
The national Tax Freedom Day is five days later than last year:
Tax Freedom Day is five days later than last year, due mainly to the fiscal cliff deal that raised federal taxes on individual income and payroll. Additionally, the Affordable Care Act’s investment tax and excise tax went into effect.
But cheer up! If taxes were high enough to pay for all government spending without borrowing, it wouldn’t be until May 9.
TaxProf, ESPN: Athletes’ Charities Fall Short of IRS, Nonprofit Standards. Chis Zorich might agree. Actually, the arguments against athletes setting up their own charitable foundations are the same as those for anybody else. They take more work and expertise to run than most people realize. Compliance with federal tax laws and state laws can be costly. It’s easy to get into trouble with them, like Mr. Zorich did. It’s much wiser for athletes with a charitable interest to work with an established charity that knows what it’s doing.
Jason Dinesen, Taxpayer Identity Theft — Part 14 . The latest adventures in trying to get the IRS to pay the refund of his client, an identity theft victim, for 2010. She may have it in “another 6-8 weeks.” We’ll see.
For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.
Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)
Of course Mr. Hatch failed to pay the taxes on income he earned in front of millions, serving a prison sentence as a result. Sometimes watching somebody else get into real trouble can be instructive.
Flickr image courtesy Sean MacEntee under Creative Commons license
April Fools day is a challenge for tax bloggers. No matter how outlandish an idea you have for a joke story, chances are that the legislation has already been proposed. Today’s challenge: Real tax headlines are mixed with fake ones from today’s Tax Policy Blog. Can you pick the real fakes without peeking?
In fact, the research activities credit is noteworthy for its excessive cost — more than $45 million each of the past three years — and the lack of any demonstration of a public benefit. This giveaway is so loosely managed that companies are not even required to disclose how many jobs are related to the taxpayer cost, let alone demonstrate that the jobs would go away without the subsidy.
Incentives are inequitable. They’re unnecessary — and hence a waste of money. They distort markets. They breed cronyism. If the players involved weren’t establishment politicians, household name corporations, and prestigious law and accounting firms, we’d describe them as grifters.
Why wouldn’t we describe ”establishment politicians, household name corporations, and prestigious law and accounting firms” as grifters? Redundancy?
Here’s a new one. A Pakistani company, the Fatima Group, would like to open a fertilizer plant in Indiana. The company, which for all I know makes the Cadillac of fertilizer, is seeking both federal and state incentives to build its factory. The twist is that the Fatima Group’s fertilizer has been used in 80 percent of roadside bombs in Afghanistan. That’s awkward.
Right now Iowa seems to lead the world in fertilizing fertilizer companies with tax money. No doubt explosive growth is just down the road.
If spending time and effort connecting with tax collectors helpfully “draws our attention to our duties as citizens,” then tax withholding short-circuits that attention. So why not eliminate withholding and oblige each income earner to pay every cent of his or her tax bill by writing personal checks to the IRS? Not only would elimination of withholding make us even more attentive to our “duties as citizens,” we would also – as any behavioral economist would point out – gain a truer and more fully felt sense of the price we pay for Uncle Sam’s splendors.
Reading Don Beaudreax Cafe Hayek blog for one week will make you smarter than all of Iowa’s legislators combined.
Zumba instructor finds way to draw men to her studio. From RegisterCitizen.com:
The dance instructor who used her Zumba fitness studio as a front for prostitution faces jail time after pleading guilty in a case that captivated a quiet seaside town known for its beaches and picturesque homes.
The plea agreement, which calls for a 10-month sentence, spares Alexis Wright from the prospect of a high-profile trial featuring sex videos, exhibitionism and pornography. She’s scheduled to be sentenced on May 31.
Wright quietly answered “guilty” 20 times on Friday when the judge read the counts, which include engaging in prostitution, promotion of prostitution, conspiracy, tax evasion and theft by deception.
Remember, just because they pay in cash doesn’t make it tax-free.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Film tax credit scams are big news in the U.K. right now. An Irish actress, Aoife Madden, yesterday received a 54-month sentence in her role in scamming a U.K. film tax credit scheme. Irish Times reports:
The group successfully claimed £1.5 million in film tax breaks after they said they intended to make a film titled Landscape of Lives with a £19 million budget, funded by Jordanian backers.
Once they were arrested two years ago, the five hurriedly produced a film called, ironically, Landscape of Lies for just £90,000, which went on to win a Silver Ace award from last year’s Las Vegas Film Festival.
The film, which starred former EastEnders actor Marc Bannerman and Andrea McClean, told the story of a former British soldier’s attempts to discover the truth behind his friend’s murder in an apparent mugging.
Before suspicions had been aroused, Madden’s London film company, Evolved Pictures, told revenue and customs that millions had been spent on Hollywood A-list actors and film crew when it lodged a value added tax repayment application for £1.48 million. It received more than £1 million.
Lost in the coverage is Iowa’s pioneering role in film tax credit scams. A little-known film producer from Minnesota came here and showed the Brits just how it’s done:
Take Iowa. A start-up called Polynation Pictures came looking for backing for a sci-fi flick so lame it would have embarrassed Ed Wood. With a financing scheme worthy of Max Bialystock, the con these folks pulled was nearly as inept as the film they made, but Iowa’s film office was too starry eyed to notice.
…
The $767,250 production Polynation Pictures proposed eventually came in at $3.7 million. This was achieved in part with preposterous expenses. Producers claimed they paid $1,350 to rent six orange road cones. The use of two 6-foot ladders supposedly cost the company $900 (a bargain, as Polynation claimed to have spent another $900 to rent a single 8-foot ladder). Among production necessities was a new Mercedes. The partners set up an array of separate companies and used them to bill themselves extravagantly for work supposedly done on the picture. These were presented to Iowa as “deferred payments”—to be paid if the movie made money (which the enterprise was sure to do when Iowa handed the tax credits over). The only thing missing was a staged rendition of “Springtime for Hitler.”
Polynation mastermind Wendy Weiner Runge received 10 years for her star turn in the film credit program.
The film credit program was touted as a way to make Iowa a leader in the film world. And, in a way, it did.
You might be interested in this interview with Ms. Madden about her role in the film, knowing what we know now. She said this:
This project has been a crazy but wonderful challenge!! I’ve always wanted to produce a feature, and have a number of projects in development, but this was the one I just wanted to lift off the page. I think the biggest challenge was sourcing finance, which is no surprise for an independent film company. We were extremely lucky to find international investors and lobby them to back the project, but this was a lengthy process and has always been a challenge.
A challenge, yes, but I’m not sure they turned out lucky.
Snatching defeat from the jaws of victory. Now that the courts have saved the IRS from itself by shutting down the misguided preparer regulation system, the Senate rides to the rescue to screw everything up again, Accounting Today reports:
The two leaders of the Senate Finance Committee, Chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, have begun developing proposals for reforming the U.S. Tax Code, including giving the Internal Revenue Service the clear statutory authority to regulate tax preparers in case the IRS loses its appeal of a recent court case invalidating its Registered Tax Return Preparer regime.
The IRS can’t answer its phones. Its pockets are being picked to the tune of billions by semi-literate South Florida grifters. And the Senate thinks that preparers are the problem? Preparer regulation is a market-share enhancement program for the national franchise tax prep outfits; the rules were written by a former H&R Block CEO. If Senators Baucus and Hatch want to re-enact these anti-competitive and useless rules, it just shows who they really represent. (Via Going Concern).
Ceremonial cross of John Frum cargo cult, Tanna island, New Hebrides (now Vanuatu), 1967 (via Wikipedia)
Heresies of the Cargo Cult. When some remote societies encountered the industrial world in World War II, they had trouble grasping what they were seeing. Wikipedia explains:
Cargo cult activity in the Pacific region increased significantly during and immediately after World War II, when the residents of these regions observed the Japanese and American combatants bringing in large amounts of matériel. When the war ended, the military bases closed and the flow of goods and materials ceased. In an attempt to attract further deliveries of goods, followers of the cults engaged in ritualistic practices such as building crude imitation landing strips, aircraft and faux radio equipment out of bamboo or whatever materials they had at hand, and mimicking the behavior that they had observed of the military personnel operating there.
While it’s easy to mock an islander for building a refrigerator-like box in hopes of conjuring up an icy six-pack, cargo cult behavior also occurs in modern societies. Without describing it as such, tax historian Joseph Thorndike writes about the cargo cult of the 1950s, where modern policy wonks try to conjure up 1950s-style growth through a ritualistic process of duplicating tailfin-era totems. For example, Timothy Noah thinks the crushing stated top marginal rates of that era might help generate those Happy Days results. Mr. Thorndike sees problems with that approach:
We still don’t know if high statutory rates and (relatively) high average rates were a drag on growth. And we can’t know, because we also can’t know what growth might have been in a different tax climate.
Moreover, a range of nontax factors were probably more important in shaping growth patterns in the 1950s. In particular, the economic disruptions of World War II had left the United States in a uniquely dominant position; by one estimate, U.S. manufacturing output constituted 60 percent of the world’s total in 1950.
In other words, it takes more than a bamboo box to conjure up that beer.
After all, the tax system of the Eisenhower era was not a very good one: It paired notionally sky-high rates with a deeply flawed tax base and created distortions both coming and going.
I understand that progressives like Noah are fighting a different battle: They are trying to beat back the rate-cutting mania that often serves as a definition of tax reform these days. But I think we might take a lesson from the tax experts of the 1950s, who understood the problems bedeviling their own tax system. As economist Harold Groves said at the time, “The impression is widely shared that the Congress deliberately throws a high-rate scale to the public as a demagogic bone and then as deliberately allows escapes from taxes that makes these rates specious.”
Mr. Thorndike is more sympathetic to high rates than I ever will be. Doing taxes for a living, I see first-hand how high rates affect behavior, and I have no patience for academics who say otherwise. But he wisely notes that simply trying to recreate the totems of the 1950s, like high tax rates, misses all of the other things that put cold beer in the refrigerator. Same thing goes for other 1950s fetishes like tail fins, industrial unionism and defined benefit pension plans.
Former Pittsburgh Police Chief Nathan E. Harper has been indicted by a federal grand jury in Pittsburgh on charges of conspiracy and willful failure to file income tax returns, U.S. Attorney David J. Hickton announced today.
The five-count indictment named Harper, 60, of Pittsburgh.
According to the indictment, Harper was the chief of the city of Pittsburgh Police Department. From 2009 to 2012, he caused at least $70,628.92 in checks and cash received by the special events office of the department to be diverted to two accounts at the Greater Pittsburgh Police Federal Credit Union. Using Visa debit cards, Harper obtained more than $31,000 in ATM withdrawals and debit purchases, all for his personal benefit. Harper also failed to file federal tax returns for the years 2008 through 2011.
If he’s convicted, maybe the special events office can throw a little party for the occasion.
What could possibly go wrong? James Timothy Turner was convicted last week of masterminding a cunning plan. DothanEagle.com reports:
According to a U.S. Department of Justice press release, Turner was convicted of conspiracy to defraud the U.S., attempting to pay taxes with fictitious financial instruments, attempting to obstruct and impede the Internal Revenue Service, failing to file a 2009 federal income tax return and falsely testifying under oath in a bankruptcy proceeding.
The FBI began investigating Turner in 2010 after he and three other people sent packages to all 50 governors demanding they leave office.
Turner is the president of a group of what prosecutors called “sovereign citizens” known as the “Republic for the united States of America.”
Send “packages” to all of the governors telling them to resign? Well, at least they weren’t trying to hide what they were doing.
Turner toured the country in 2008 and 2009 teaching seminars that instructed attendees how to submit bonds to pay off tax debt.
According to prosecutors, these bonds were completely fictitious and often written for amounts in excess of $1 billion.
Silly man. Only the Federal Reserve can do that. Unless we’re talking about the $1 trillion magic coin…
So, for those tax professionals engaging in such transactions that they know violated a known legal duty, their conduct is illegal and unethical. For those transactions engaging in such transactions where they don’t know (perhaps are willfully ignorant) that the conduct is illegal (ultimately most of the b—-t tax shelters are found to be illegal), then at least the ethical issues arise. These are smart professionals, paid (supposedly) to predict what a court will do with the b—–t tax shelter. Yet, in the prominent civil cases that swat down b—–t tax shelters, they fail miserably in their predictions.
IRS waives late payment penalties for returns containing delayed forms. If you can’t file or pay taxes on time, it’s always better to extend your return while you round up the information or the cash. The penalty for filing a late unextended return is 5%, plus an additional 5% for every additional month of late filing. The penalty for paying late on a timely extended return, in contrast, is only 1/2%, plus 1/2% per additional month.
While penalties will be waived, the IRS will charge interest on amounts paid after the deadline.
The notice has a complete list of forms that allow taxpayers to qualify for the late payment exception. The most commonly-seen ones are probably Form 4562, for depreciable assets and the section 179 deduction, and Form 8582 for passive activities.
By issuing this notice early, the IRS has also given taxpayers a planning opportunity. If you have a big balance due on April 15, and you have one of the qualifying forms, you now are eligible for what amounts to a low-interest loan for up to six months, until the October 15 extension deadline. Many taxpayers accelerated income into 2012 to beat the 2013 tax hikes, and they loan might come in handy. The current IRS interest rates:
three (3) percent for underpayments;
five (5) percent for large corporate underpayments
But if you have the cash, you probably want to pay up on April 15. There aren’t many places left where you can get a 3% after-tax return on your money for six months.
David Cay Johnston, Level Playing Fields Under Attack. (Tax.com). Because we don’t want Wal-Mart to be at the mercy of some guy selling stuff from his basement.
The road not taken. I left a national accounting firm to start a new firm. A (purported) alumna of the same firm took a somewhat different path. (Going Concern)
The 4.5% tax on AGI, with no credits and no deduction for federal income taxes, would be an alternative to the current multi-rate, high-loophole system. Taxpayers could choose which way to file.
Of course, taxpayers would compute their taxes both ways and pay the lower amount — making it an Alternative Maximum Tax. With the Alternative Minimum Tax, taxpayers compute their tax two ways and pay the higher amount. It would add one more complication to an already complex system. And, as I have noted, AGI is a flawed measure of taxable income.
The bill has just about no chance in the Iowa Senate, absent some incriminating photos of Democratic senators falling into Republican hands. Bill opponents made dreary but predictable soak-the-rich arguments against the bill:
Democrats, however, criticized the bill for affecting just a fraction of Iowa taxpayers or for providing far more benefits to high-income earners.
Citing the Department of Revenue data, they noted about 5,000 income earners making more than $500,000 stand to save as much from the flat tax – around $90 million – as the 326,000 earners making less than $90,000 a year.
They aren’t saying that the lower earners don’t benefit. They are just saying that the high earners benefit too much. Of course, it means the high income earners pay a lot more tax than the lower earners right now. It’s a silly argument — even sillier if you consider that state taxes are an awful tool for income redistribution. My analysis indicates the bill would benefit most filers, not just the “rich.”
I don’t believe the Alt Max Tax was seriously intended to become law. I think it was designed to try to keep the cause of income tax reform alive in a year that the Governor has no interest in it. It may also be a trial balloon to see if a proposal that lacks federal tax deductibility would draw fatal fire from the powerful lobbying group Iowans for Tax Relief. So far, no. While the bill (formerly HF 3, now HF 478) is flawed, maybe it advances the debate. Maybe next year, they’ll take up something like The Quick and Dirty Iowa Tax Reform Plan.
IRS extends certification rule, making Work Opportunity Credits available for all of 2012. Congress retroactively extended the Work Opportunity Credit to 2012 at the beginning of 2013. Unfortunately, one of the qualifications for taking the credit is to certify that an employee qualifies for the credit within 28 days of hiring. That made the credit useless for most of 2012.
The IRS has now given employers until April 29, 2013 to file the necessary paperwork with the local Job Service offices. Notice 2013-14 has the details. Accounting Todayhas more.
When you are running a big criminal tax conspiracy, never hit “reply all”. From Bloomberg News:
Everybody knows the danger of sending things inadvertently in an e-mail. Beda Singenberger’s case shows you also have to be pretty careful when you mail things the old-fashioned way.
Over an 11-year period, federal prosecutors charge, Swiss financial adviser Singenberger helped 60 people in the U.S. hide $184 million in secret offshore accounts bearing colorful names like Real Cool Investments Ltd. and Wanderlust Foundation.
Then, according to a prosecutor, Singenberger inadvertently mailed a list of his U.S. clients, including their names and incriminating details, which somehow wound up in the hands of federal authorities.
Illegal procedure. Former Chicago Bear Chris Zorich has been flagged. CBS Chicago reports:
Zorich, 43, was charged Thursday with four misdemeanor counts of failing to file federal income tax returns, for the years 2006 through 2009, according to the U.S. Attorney’s office. During that time, he allegedly had an income of more than $1 million.
Federal prosecutors said Zorich was cooperating with the investigation and has agreed to plead guilty.
His lawyer says that he owes no more than $70,000 after withholding on the non-filed years is applied.
I wonder why he was charged. While it’s a bad idea, it’s not extremely rare for people to just get behind on filing their returns. It doesn’t usually lead to criminal charges. Much of his income for the years at issue was W-2 income, so it wasn’t as though the IRS would miss him.
Perhaps he did something to annoy an examiner enough to call in the Criminal Division. Maybe it’s because he is an attorney [update: he apparently never passed the bar exam]. Or maybe he’s just unlucky to be famous-enough for the IRS to use his celebrity to frighten the rest of us into getting our returns done. (Via Reason 24/7)
Update: This Chicago Tribune report suggests that self-dealing with his charitable foundation may have been a factor.
These wages cannot include wages paid to your children under age 18 (if a sole proprietor farmer) and commodity wages. However, wages paid in cash to spouses and children over age 17 are allowed as part of these wages.
If you are a schedule F farmer with no employees, the W-2 requirement makes the Section 199 deduction worthless.
Seventh, ask the tax professional about data security. Where and how is paper data stored while in the hands of the preparer? Where is the digital data stored? What precautions are in place to minimize the chances of a third party breaking into the office or the digital servers and obtaining information? If the individual hands over paper records without keeping copies, which is an unwise move, what happens if the tax professional’s office burns down?
Berkeley City Councilman Gordon Wozniak has tossed out the idea of an email tax to help save snail mail.
The financial straits of the U.S. Postal Service became an issue for Berkeley lawmakers when the paper mail delivery system proposed closing that northern California city’s downtown post office and selling the building.
It won’t happen, but a state where somebody who thinks it could happen can be elected to public office is pretty much doomed.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
