Posts Tagged ‘tax fairy’

Tax Roundup, 1/27/14: Job destruction incentives. And: did you ride your bike today?

Monday, January 27th, 2014 by Joe Kristan

 

Flickr image courtesy Retrofresh! under Creative Commons license.

Flickr image courtesy Retrofresh! under Creative Commons license.

You mean state tax credits aren’t magic beans for economic development?  A frequent commenter on the Econlog blog, Daniel Kuehn, shares some early work on a paper he is preparing on “job creation tax credits” (my emphasis):

 The paper is on the employment and earnings effects of job creation tax credits (and actually investment credits… I’ve recently found out they were phased in using the same selection rule so I can’t distinguish the two, which is fine I guess).

My prior was that they would create jobs and raise wages. I have a good identification strategy – an RDD model. But one thing lacking in the existing literature on it is a way of dealing with displacement effects (in other words, person A gets the job from the tax credit by displacing person B who was not eligible for the credit). I can deal with that (at least within-county displacement). I expected that would reduce the effect somewhat of course, but I was sure even after accounting for displacement the credits would still generate jobs.

So far, they seem to reduce employment. Displacement appears to be a big problem.

There is one other explanation I’m investigating now. You have to create full time jobs to get the credit, so it is possible that I’m seeing a negative employment effect because part time jobs are being replaced with full time jobs. I’m investigating that now with individual level data. So in the end, it may create full time jobs and destroy more part time jobs, in which case it would be interesting to look at the impact on total hours.

I’m not sure how it will all shake out in the end, but I am definitely less confident in policy than I was before I started this.

Mr. Kuehn should be respected for following his data in spite of his prior assumptions, but that’s the result I would have expected.  The money going to the subsidized jobs has to come from somewhere, and much of it comes from unsubsidized businesses.  The politicians like to point to the jobs they “create” with “Economic development” incentives, but they ignore the loss of jobs in competing businesses and from the increased taxes on the unsubsidized.

It’s the old broken window thing.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

 

Scott Drenkard, Indiana House Unanimously Approves Incentive Study Commission.  Iowa did this a few years ago, and the study panel was unable to identify any clear economic benefit to the giveaways.  And they just went on enacting more giveaways.

 

William Perez points out some Resources for Getting Organized for Tax Time

Kay Bell, Tax filing checklist 2014

Paul Neiffer reminds us that You Must Start IRAs Draws at Age 70 1/2!.  Except for Roth IRAs, of course.

Jana Luttenegger, Taxing Bike Share Programs.  She discusses the expiration of a tax break for bike commuters, but notes:  ” With our recent below-zero weather, the bikes likely aren’t being used much currently… “

Enjoying a short Des Moines winter commute.

Enjoying a short Des Moines winter commute.

Russ Fox answers the question, It’s Only $1,300; Do You Really Have To Send Me the 1099?

 

Annette Nellen, Minnesota Storage Tax Problems.  She discusses an expansion of Minnesota sales taxes:  ”Any base broadening should only cover consumption of individuals (non-businesses).”

Peter Reilly, Obama Administration Weak On Church State Separation? Clergy Housing Allowance Appeal.  The Department of Justice has appealed the Wisconsin District Court Ruling disallowing tax-free cash “housing allowances” for pastors.  The ruling is stayed pending the appeal.  I suspect this is just a maneuver to get through this tax season with minimal disruption to existing plans.  I think it is likely that the District Court ruling will be upheld, and churches should plan accordingly.

 

tax fairyJack Townsend, Yet Another B***S*** Tax Shelter Goes Down Flaming.    There is no tax fairy.

Stephen Olsen, Summary Opinions for 1/24/2014 (100th Post!!!), a roundup of tax procedure news.

 

TaxProf, The IRS Scandal, Day 263

That’s a funny way to aid the nurses.  Second Nurses Aide Sentenced for Conspiracy to Defraud the Government (U.S. Attorney press release)

Tax Trials, Willie Nelson, The IRS’s Most Talented Musician.  Talk about not building expectations.

News from the Profession: The SEC Bans Big 4 Member Firms in China For Failing to Show Their Work (Going Concern)

 

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Tax Roundup, 1/13/14: They’re back edition. And: tax fairy doesn’t show up at appeals court.

Monday, January 13th, 2014 by Joe Kristan


20130117-1
The 2014 session of the 85th Iowa General Assembly begins today.
 It doesn’t look like much tax legislation will pass.

The Governor abandoned a plan to allow taxpayers to choose between the current byzantine Iowa income tax and a lower-rate version with fewer deductions and no deduction for federal taxes paid even before the session started.  He instead will focus on lame feel-good initiatives in an election year, reports Omaha.com:

Gov. Terry Branstad is set to unveil his agenda Tuesday during the Condition of the State address. He said his priorities will include expanding broadband Internet access, fighting school bullying and curtailing student loan debt.

The Governor’s opposition will block any tax reform that isn’t sufficiently punitive to the “rich” — which means any reform worthy of the name.  They will try to change some of Iowa’s worst corporate welfare giveaways, reports the Des Moines Register, but the Governor, an inveterate smokestack chaser and ribbon-cutter, can be expected block any restrictions on using your money to lure and subsidize your competitors.

Meanwhile, trial balloons about increasing the gas tax have already deflated.  That means we can expect a quiet session on the tax front, and a continuation of Iowa’s insanely complex and worthless tax system for another year.  But if they change their minds and want to do something useful, it’s always a good time to talk about The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

tax fairyTax Fairy seeker loses appeal.  A South Dakota surgeon who looked across the ocean for the Tax Fairy found only grief — and the grief wasn’t alleviated on appeals.  The Eighth Circuit Court of Appeals last week upheld the conviction that led to a five-year sentence for Dr. Edward Picardi.

The doctor used a scheme where he “leased” his medical services to an offshore company he controlled to artificially reduce his income by stashing earnings in offshore accounts.  The scheme was promoted to him by an attorney-CPA who has been acquitted of criminal charges in another employee leasing case.

Other taxpayers have avoided fraud penalties from employee-leasing to offshore entities (see here), but not taxes and penalties.  When the best you can say about a tax plan is that you avoided fraud penalties, it’s not much of a plan.  There is no tax fairy.

Prior coverage here.

 

Kay Bell has Important January tax dates, deadlines

 

Lyman Stone, Should Nebraska Follow the Example of Illinois or Indiana?  “The case of Illinois is a great example of how higher taxes can contribute to a worsening business climate, which leads to less jobs.”

Annette Nellen, Marijuana and the Tax Law.  Despite appearances, there is no evidence the lawmakers are smoking something when they write tax laws.

TaxGrrrl, Top 10 Most Litigated Tax Issues.  Number one is penalties.

TaxProf, The IRS Scandal, Day 249

Robert D. Flach offers a SPECIAL OFFER FOR ITEMIZERS!

 

TaxTrials, Famous Fridays: Wesley Snipes, A Lesson in Listening to Bad Advice.  Did he ever.

 

The Critical Question: Massages May Feel Nice, But Can You Deduct Them at the Poker Table? (Russ Fox)

News from the Profession: KPMG Upgrades Its Female Interns From Necklaces to Camisoles  (Going Concern)

 

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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, 11/1/13: Unhappy Halloween for tax shelter maven. And: clunk!

Friday, November 1st, 2013 by Joe Kristan

 

tax fairyGuilty again.  Former Jenkens and Gilchrist tax shelter wizard Paul Daugerdas was again convicted on tax crime charges yesterday arising out of the great tax shelter frenzy of the Clinton and Bush II years.   A previous conviction was overturned on grounds of juror misconduct.  Bloomberg Businessweek reports that he was convicted on seven of 16 counts.

A co-defendant, former BDO Seidman CEO Denis Field, was acquitted.

Mr. Daugerdas built a fortune around tax shelters with clever names like “HOMER,” “CARDs” and “BLISS.”  The shelters typically involved offsetting investment positions, with losses allocated to shelter customers and gains allocated to tax-indifferent offshore entities.  The shelters have fared poorly on exam and in the courts, with a nearly unbroken record of failure in litigated cases.

Mr. Daugerdas built a fortune around selling access to the Tax Fairy, the magical sprite who waves her wand to make tax problems go away.  The news that there is no tax fairy proved costly to his clients, and probably also to him.

Link: Prior Tax Update Daugerdas coverage.

 

20121212-1Clunk.  Cash for Clunkers was an expensive boondoggle, reports the Brookings Institution.  The study estimates that the program cost $1.4 million per “job created” while destroying thousands of perfectly good vehicles and raising transportation costs for those who rely on used cars.

Related:  Braley: “Cash for Clunkers” phenomenally successful (Radio Iowa)

Kyle Pomerleau,  Cash for Clunkers: Not Much of a Stimulus (Tax Policy Blog)

 

TaxGrrrl, IRS Announces 2014 Tax Brackets, Standard Deduction Amounts And More   

 

Paul Neiffer,  Calculating Cost Basis Wrong Can Be Costly!

Peter Reilly,  Actuary In Tax Court Beats Northwestern And IRS On Accuracy Of 1099-R.

Janet Novack, Top Social Security Tax To Rise 2.9% In 2014; Benefits Going Up 1.5%

Tax Trials, IRS Resumes Field Exams & Collections.  The shutdown is truly over.

Phil Hodgen’s  series on the expatriate exit tax continues with Chapter 4 – Are You A Covered Expatriate?

TaxProf,  The IRS Scandal, Day 176

Robert D. Flach is celebrating his 60th birthday with a sale.

 

Howard Gleckman,  As Budget Talks Start, Beware the Bogus Revenue Hikes (TaxVox) “But behind the scenes, Washington’s wink-and-nod crowd thinks it has a solution: Raise new tax revenue—at least on paper—without actually increasing taxes. In fact, some of the gimmicks on the table create even darker Halloween magic.”

Tax Justice Blog, Kansas: Dispatches from a Failing Experiment

 

Going Concern,  Career Conundrum: Is a Master’s Degree Worth It?  It’s all relative.  To me it was, because my it was in Accounting, while my  B.A. was in History — a noble field, but one with grim employment prospects.  If you have an undergrad degree, I’m not so sure it’s worth forgoing a year or two of salary.  If you don’t have a job anyway, it may be the edge you need.

 

Kay Bell, A colorful way to ease IRS notice fears:

Adam Chodorow, however, has an idea of how to ease such tax correspondence induced panic attacks.

Chodorow, a professor at Arizona State’s Sandra Day O’Connor College of Law, suggests color-coding so that taxpayers will immediately know the amount of tax trouble they are in. This, he says, could abate taxpayer stress.

If the IRS could be relied on to issue accurate notices, that would be lovely, but incorrect “red” notices would probably induce a rash of taxpayer heart episodes.

 

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Tax Roundup, 10/2/2013: essential government function edition. And… commas!

Wednesday, October 2nd, 2013 by Joe Kristan
Wikipedia image courtesy Tallent Show under Creative Commons license

Wikipedia image courtesy Tallent Show under Creative Commons license

A bunch of federal government workers stayed home yesterday, but enough showed up to try to keep some 90-year olds off the grounds of the World War II memorial in Washington.  They will try to stand up to the guys in wheelchairs again today.  That must be one of those essential government functions.

 

Today’s shutdown roundup:

Kay Bell, Government shuts down. Who, besides citizens, will pay?

Janet Novack,  Federal Government Begins First Shutdown In 17 Years 

TaxGrrrl, Congress Marches Towards Shutdown, Spares Military   

Tax Trials, Tax Court Filing Deadlines during Government Shutdown

Joseph Thorndike, The GOP Is Right About One Thing: Ditch the Medical Device Tax (Tax Analysts Blog):

Narrow excise taxes — even when somehow correlated with special benefits — are not a good way to fund major social programs. Broad programs deserve broad taxes.

True.  But the political magic behind ACA was the idea of a “free” mass welfare benefit  – free to you, anyway, because some rich guy gets the tab.  But as Joseph has pointed out, the rich guy isn’t buying.

Len Burman, Would the Government be Shuttered if Obamacare were Romneycare?

Russ Fox,  The Government Shutdown and Taxes

 

Jason Dinesen,  Life After DOMA: Audits of Prior-Year Returns.  Jason explains how audits work for amended returns of same-sex married couples.

William Perez, How Social Security Benefits are Taxed by State

Jim Maule, Failing to Keep Those Records Can Increase Taxes

It is not implausible that the taxpayers paid more than $2,052 for the support of the wife’s mother. Certainly during the time when she was living with them, a portion of the costs of maintaining the taxpayers’ residence constituted support of the wife’s mother. But apparently the taxpayers did not offer any evidence of those costs.

It’s up to the taxpayer to keep the records needed to support your tax return.

 

TaxProf, Supreme Court Grants Cert. to Decide Whether Severance Pay Is Subject to Payroll Tax.  Is being paid to go away taxed the same way as being paid to work?

Peter Reilly, Court Rules Against Slots Playing As A Business 

Tony Nitti, The Real Winner In The Breaking Bad Finale: The IRS   

 

tax fairyPhil Hodgen, Sooner or later, secrecy fails as a tax planning strategy:

Americans: secrecy is a weak tax planning strategy; stop using it.

What seemed like a good idea 10 years ago has now compounded itself into a seemingly intractable dilemma. I know this because people tell me so every day.

Start looking for what is true, not what you want to be true. When you hear the answer, accept it. Swallow and digest the big chunks of truth.

In other words, there is no Tax Fairy

 

 

Jack Townsend,  Article on DOJ’s Swiss Bank Initiative

Keith Fogg, Representing Clients in Tax Court (Procedurally Taxing)

Robert D. Flach, SOME REMINDERS

 

News from the profession.  BREAKING: Commas To Be Added to the CPA Exam (Going Concern).  “We are adding a comma to the calculator on the CPA Exam. The comma is meant for large numbers such as 1,000 and above to make them easier to read.”  Calculators.  With commas. In my day when we took the exam, we had “fingers.”

 

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Tax Roundup, 9/24/2013: The tax fairy is no cheap date. And nice words about my big mouth.

Monday, September 23rd, 2013 by Joe Kristan

Tax Shelter STARS dims in Claims Court.  The high-priced marketed tax shelter craze that started in the late 1990s by the big national accounting firms and some law firms has produced terrible results in litigation.  The latest failure is the KPMG/Sidley Austin tax shleter “STARS,” which was shot down in the Court of Federal Claims last week.

tax fairyThe shelter was designed to generate foreign tax credits against BB&T Corporation’s U.S. taxes.  While the shelter was put together by some of the biggest names in the tax profession, the judge was unimpressed:

Applying these principles here, the STARS transaction must be seen for what it really is. By creating a trust arrangement with nothing but circular cash flows, and momentarily placing funds in the hands of a U.K. trustee before it is returned, Barclays and BB&T artificially caused a U.K. tax on U.S.-sourced revenue. There was no substantive economic activity occurring in the U.K. to warrant a U.K. tax. Yet, by subjecting the Trust funds to a U.K. tax, Barclays and BB&T were able to share the benefits of foreign tax credits, which resulted in a 51 percent rebate of a Bx payment to BB&T. The surprisingly low interest rate to BB&T on the $1.5 billion Loan, 300 basis points below LIBOR, was made possible solely because of the fruits of the Trust arrangement. In reality, the U.S. Treasury is funding the monetary benefits realized by BB&T, Barclays, and the U.K. Treasury. No aspect of the STARS transaction has any economic reality.

When taxpayers got involved in tax shelters set up by big-name firms, they often did so believing that reliance on well-known national firms will protect them from penalties.  Not here:

KPMG’s overarching advice was that BB&T should engage in an economically meaningless transaction to achieve foreign tax credits for taxes BB&T had not in substance paid. Thus, because KPMG’s advice was based on unreasonable and unsupported assumptions, the Court finds KPMG’s advice unreasonable.

Based on KPMG’s recommendation, BB&T also selected the law firm of Sidley Austin, and in particular, Raymond J. Ruble, to provide tax advice and a formal opinion on STARS… Because Sidley Austin’s tax opinion was premised on the unreasonable and unsupported assumption that technical compliance with U.S. tax law would allow the IRS to give its imprimatur to an economically meaningless transaction, the Court finds Sidley Austin’s advice unreasonable.

So the judge undid $660 million in claimed tax savings and added $112 million in penalties to the bill.

The Moral?  Some of the brightest minds in the tax business thought they had finally found the Tax Fairy, the magical sprite that can make your taxes go away with fancy tax footwork.  They sold their discovery to folks just as eager to believe in the Tax Fairy as they were.  But there is no Tax Fairy.

Cite: Salem Financial, Inc., Ct. Fed. Claims, No. 1:10-cv-00192

Related: Jack Townsend,  Yet Another B***t Tax Shelter Goes Down; BB&T’s Streak on B***t Tax Shelters Continues

 

Iowa: an alcohol-dependent nicotine fiend with a gambling problem. From the Sioux City Journal:

In fiscal 2012, Iowa reaped $710.6 million from so-called “sin taxes.” Although that was 4.8 percent of the state’s total revenues of $14.65 billion, it was far less than the $3.7 billion in individual income taxes and $2.1 billion in sales taxes Iowans paid in fiscal 2011.

Still, it greatly exceeds the net take of Iowa’s complex, high rate and futile corporation income tax, which netted $430.4 million of the state’s $7.42 billion in tax revenues in fiscal 2012.

 

William Perez, Using Tax Refunds to Pay Estimated Taxes.  Applying overpayments to the next year’s estimated taxes is a very useful part of any tax planner’s toolkit.

Phil Hodgen,  Rental Income and Branch Profits Tax. “

Branch profits tax is computed on the corporation’s taxable income. The branch profits tax does not care about your net operating loss.

This means that you can have years where the corporation pays no income tax (because it has a net operating loss from the prior year that eliminates the taxable profit generated in the current year). But the corporation will pay the branch profits tax.

If you deal with offshore corporations with U.S. activity, you should read this.

Russ Fox, The Affordable Care Act and Gamblers: A Bad Bet

 

Janet Novack,  In Reversal, IRS Gives Amnesty To Owners Of Secret Israeli Bank Accounts   

TaxProf,  WSJ: Offshore Accounts: No Place to Hide?.  I think offshore bank secrecy is pretty much done for.

Kay Bell,  7 Internet sales tax principles set for House consideration

Peter Reilly:  TIGTA Finally Stumbles On The Real IRS Scandal   Peter seems to think cronies with undue influence on letter rulings is worth than partisans using the power of the IRS to suppress uncongenial political organizations.

TaxGrrrl,  Government Shutdown 101: What Happens When The Lights Go Off?   

Oh Goody.  Payroll Taxes May Have to Go Up (Andrew Lundeen, Tax Policy Blog).

Elaine Maag,  Senator Lee’s New Reform Plan Focuses on Young Children (TaxVox)

 

A scene from the heydey of Iowa energy independence.

Great moments in energy independence.  Biofuels scam ‘the largest tax fraud scheme in Indiana history’  (Biofuels International)

 

That would do that.  Fraud verdict tarnishes Idaho businesswoman’s bio (SFGate.com)

 

 

News from the profession: Five  Unwritten Rules for Making Partner in a Big 4 Firm (Going Concern).  Spoiler: landing great big audit clients helps a lot.

 

Aw, shucks.  Tax Analysts commenter David Brunori says nice things about me today in State Tax Notes ($link):


Many practitioners are gun-shy when it comes to voicing their opinions on tax policy. They have clients, after all, who might disagree with them. Joe Kristan of Roth CPA, a leading tax and accounting firm in Iowa, is an exception. Kristan, writing for the firm’s blog, routinely speaks truth to power. We here at Tax Analysts appreciate that. 

That’s the nicest way anybody has ever said that I don’t know when to shut up.

Mr. Brunori then discusses my observations of Iowa economic policy director Debi Durham and State Senator Joe Bolkcom:

Durham talks about the tax-incentive imperative, which only the gods of crony capitalism would recognize. But then one would expect a government official who spends her time doling out government welfare to corporations to defend the idea of doling out welfare to corporations. Citing the state’s blue ribbon commission, Kristan pointed out that there is little evidence that tax incentives work.

Kristan has criticized State Sen. Joe Bolkcom (D) for arguing for targeted tax incentives. Targeted incentives violate every notion of sound tax policy and, as Kristan wisely points out, assume the state can wisely allocate investment capital. We need more people who understand how everything works to weigh in on tax policy.

I would be surprised if you could fill a coffee table at the Capitol cafeteria with legislators who could explain the opportunity costs of targeted tax credits.

 

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Tax Roundup, 10/2/2012: Des Moines has to repay $40 million in illegally-collected taxes. Also: Kansas City tax shelter figure arrested.

Tuesday, October 2nd, 2012 by Joe Kristan

The City of Des Moines will finally do the right thing, having exhausted all venues to do otherwise.  The Supreme Court yesterday ruled that the city must repay $40 million of an illegally-imposed franchise fee on utility bills.  The Des Moines Register reports:

The high court’s ruling centers on franchise fees that are added to customers’ gas and electricity bills. A lower court ruled that the city charged excessive fees for a period of years, in essence an illegal tax. The high court declined to review the lower court’s order requiring the city to repay roughly $40 million to residents who paid the illegal tax.

Mayor Cownie predicts disaster and famine:

City lawyers have fought the case for years by arguing, in part, that any refunds would lead inevitably to higher property taxes — in essence taking money out of one pocket of city residents to place cash in another.

Cownie said the city would pursue options fairest to citizens while balancing the long-term realities of a beleaguered city budget. Any franchise fee repayment from the city would likely come from a mixture of property tax increases and cuts to city services, he said.

“We’re not just cutting away fat. We’re cutting away muscle and bone and tendons,” he said.

It’s useful to imagine how much sympathy the city would offer a taxpayer who had illegally collected money from the city.  “I’m not just cutting away fat.  I’m cutting away essential services for myself and my family, like my house and my car.”  Of course, the city has compounded its own problems by litigating all the way to the U.S. Supreme Court, piling up legal fees and interest on top of the refunds.

The city now has to pay up, though the Register story makes it look like the city isn’t exactly racing to cut the refund checks.

The Moral?  Next time, don’t collect an illegal tax, and if you do, repay it. 

 

Supreme Court declines to review West Des Moines S corporation compensation case.  In addition to denying Des Moines’ franchise tax appeal, the Supreme Court yesterday denied a hearing in an important case involving the so-called “John Edwards Shelter,” named after the former vice-presidential nominee and model husband who ran his law practice in an S corporation.

A U.S. district court held that an area CPA who reported $24,000 of wage income and around $200,000 of K-1 income from his S corporation had to report as compensation around $90,000 of the income; the Eighth Circuit upheld the ruling in February (David E. Watson, P.C. v. U.S).   The tax law imposes payroll taxes on compensation, but not S corporation K-1 income, so the taxpayer must pay payroll taxes on the additional compensation.    The denial is reported on page 50 here.

 

Being enjoined is bad.  Being indicted is worse.  An attorney who was enjoined from promoting some extremely aggressive tax shelters in the Kansas City area now has worse problems, as outlined in a press release from the California Franchise Tax Board:  Los Angeles Tax Professionals Arrested for Illegal Tax Schemes Costing State $7.6 Million:

A Cerritos CPA and Los Angeles attorney were  arrested today on felony charges of conspiracy and tax evasion, the Franchise  Tax Board announced.

Victor George Kawana, 53, and Blair Stover,  51, each own one-third of Kruse Mennillo, LLP. According to FTB special agents,  Kawana and Stover allegedly promoted an abusive tax avoidance transaction  (ATAT) to more than 100 clients during the years 2002-2005. The fraudulent  activity cost the state more than $7.6 million in tax liability.

They each face three felony counts of aiding  in the preparation of false state income tax returns and one felony count of conspiracy.  Each tax count carries a maximum sentence of three years in state prison.

The charges appear to arise from the same sorts of shelters Mr. Stover was enjoined from promoting:

They instructed their clients to utilize an  ATAT involving the creation of Nevada corporations and Roth IRA or Employee  Stock Option Plans (ESOP) as the sole shareholders. The ATAT was formed with a  series of related transactions with no valid business purpose other than tax  evasion.

Kawana and Stover were recently arrested and  both pleaded not guilty at their arraignments.

Mr. Stover got his start at national firm Coopers and Lybrand in St. Louis, later moving to their Kansas City office.  He joined the Grant Thornton office there before going to Kruse Menillo, LLP.

While a number of the tax shelters involved did poorly in court, that doesn’t make it a crime to promote them; the defendants are innocent until proven guilty.  Whatever the outcome of the trial, we can safely assume that the shelters relied on taxpayers’ eternal pursuit of the tax fairy, that mythical creature who can magically make income taxes go away without pain and without risk.  There is no tax fairy. 

Thanks to an alert reader for the tip.

 
Martin Sullivan,  Romney Advisor Advocates Tax Hikes (Tax.com): “He proposes putting a cap on everyone’s tax benefits from deductions and credits equal to some percentage (perhaps 2 or 3 percent) of adjusted gross income and using the revenue gained for both rate cuts and deficit reduction”

Richard Morrison,  Chart of the Day: The Average Tax Rate for the Rich (Tax Policy Blog):

 

Patrick Temple-West,  Essential reading: Payroll tax cut is unlikely to survive into next year, and more

TaxGrrrl,  Comment for the Cure: Cancer, Comments, Cures and Yeah, Taxes

Trish McIntire,  Chicken or Egg Tax Cut

Jack Townsend has two more posts on the affirmation of sentences for figures in the “Aegis” tax shelter case:  Aegis Convictions Affirmed Installment #4 – the Conspiracy Conviction and  Aegis Convictions Affirmed Installment #5 – IRS Notices and Harmless Error

Kay Bell,  Tax moves to make in October 2012

William Perez,  Consider Accelerating Salary Income into 2012

Howard Gleckman,  If Congress Goes Over the Fiscal Cliff Your Taxes Will Likely Go Up (TaxVox):

If Congressional gridlock sends the U.S. government tumbling over the fiscal cliff later this year, Americans could face an average tax hike of almost $3,500 in 2013. Nearly 9 of every 10 households would pay higher taxes. Every income group would see their taxes rise by at least 3.5 percent, but high-income households would suffer the biggest hit by far, according to a new Tax Policy Center analysis.

TPC found that if the tax hikes last the entire year—a big ”if”–those in the top 0.1 percent would pay an average $633,000 more than if today’s tax rules were extended. However, even middle income households would take a hit: they’d pay an average of almost $2,000 more, and see their after-tax income fall by more than 4 percent. Such tax hikes would be “unprecedented,” said the paper’s authors, Bob Williams, Eric Toder, Donald Marron, and Hang Nguyen.

So, have a nice day!

 

Kaye A. Thomas, Roth Conversions Ahead of 2013 Tax Increases.

The Critical Question: What is this “Fiscal Cliff,” and why are we in this handbasket?  My new post at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs.

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Tax Roundup, 10/1/2012: the thin blue line of sales tax scofflaws. Plus: the dangers of finding your roots.

Monday, October 1st, 2012 by Joe Kristan

Keeping your drunk cousin from starting a fight at the wedding reception: a taxable service?  From globegazette.com:

The state Department of Revenue is demanding that 46 Iowa police officers pay back sales taxes from years of working off-duty assignments such as wedding receptions and business security.

Department spokeswoman Victoria Daniels said the plan is to pursue back sales taxes for up to 10 years for those officers who have never filed tax returns for off-duty jobs.

Iowa only requires service providers to collect sales tax for “enumerated services.” CPA services and legal services are not “enumerated,” but “security and detective services” is, along with, for example, reflexology.  The thin blue line is not pleased.

Iowa law enforcement groups have tried for years to convince the Revenue Department not to require police officers to collect sales tax from businesses and individuals who hire them for off-duty gigs. Revenue officials considered drafting a change to the state’s administrative code to exempt officers, but ultimately decided the law clearly required officers to pay up.

So this obviously isn’t news to the officers, who blew off the tax collection requirement anyway.  Next time you get pulled over, try to convince the officer not to require you to slow down.

 

Aegis trust promoters sentences upheld.  The Seventh Circuit has upheld long sentences for the masterminds behind a sham trust scheme that operated out of the Chicago suburb of Palos Hills in the 1990s.  From the opinion:

     The Aegis trusts were typically marketed to wealthy, self-employed individuals whose income could not be easily traced through the W-2 forms that are issued to ordinary taxpayers. Aegis representatives, including the defendants, conducted seminars promoting the Aegis trusts in cities around the country. Attendance at these seminars was by invitation only, and guests were charged between $150 and $500 to participate. Attendees were told at such seminars that use of the Aegis trust system would reduce if not eliminate their federal income taxes. They were often given materials that purported to document the legitimacy of the system with seemingly thorough and impressive citations to the various legal authorities that supported the trusts. But as one lawyer wrote to a client who sought his advice as to the legitimacy of the system:

      “This material is full of errors, irrelevancies and partial truths followed by non sequiturs. I know that I must resist the temptation to follow every line or I could spend the rest of my life on this. I will concentrate on how, even if it were 99 percent correct, the claimed tax effects fail. In doing so, I’m not implying that that 99 percent is correct. I’m just skipping over the errors.”

The longest sentence is 223 months, which works out to over 18 years.  Under federal sentencing rules, the sentence can be reduced by only about 10% for good time; there is no early out.

The Aegis clients learned the hard way that there is no magical trust formula to get out of taxes.  There is no tax fairy.  Tax Attorney Jack Townsend finds the decision worth three posts (1, 2, 3).

Cite: USA v. Michael Vallone, CA-7, No. 08-3690

 

When genealogists go bad.  From Billings, Montana via SFGate.com:

 A Billings woman who said she filed false tax returns using the Social Security numbers and birth dates of deceased people she found while doing genealogy research online has been sentenced to more than four years in prison and ordered to pay nearly $130,000 in restitution to the IRS.

Maybe she was doing genealogy research, maybe she wasn’t.  While the “Death Master File,” the list of dead people published by the government, is prized by those researching their ancestry, identity thieves love using it to file refund claims for the recently deceasedThis report on the Billings woman from the Billings Gazette makes me wonder if the genealogy was an excuse of some sort:

I am so sorry for my bad behavior. I have so many amends to make,” said Shannon Kathlina Grimm, 41.

Crying as she apologized to the court and to family members and friends, Grimm said, “I know I can be a good person. You will not see me again. I will not be in trouble again, I promise you.”

But Chief U.S. District Judge Richard Cebull told Grimm she deserved more time on top of what she has already spent locked up while the case was pending and sentenced her to four years and three months. The term was at the high end of the guideline range, which started at 41 months.

Cebull also ordered her to pay $129,498 restitution to the IRS.

“Obviously, Ms. Grimm has little, if any, respect for the law,” Cebull said. He noted Grimm’s state conviction for issuing bad checks and her violation of a deferred sentence. She was on probation when she committed the federal fraud crimes, he said.

Maybe it’s genealogy gone bad.  Right, because ancestry research is notorious as a gateway to a life of crime.

For a good view of the fiscal cliff, Check out Roger McEowen’s List of Expired and Expiring Provisions.

Martin Sullivan,  Wrong Turns At the Fiscal Cliff  (Tax.com)

Jana Luttenegger,   Cashing in on a Life Insurance Policy (Davis Brown Tax Law Blog)

Kay Bell,  Bank forgiveness of phantom debt could create tax problems for former debtors.  Of course, so does forgivenes of real debt.

Jason Dinesen,  The Difficulties of Tax Planning with an Inept Congress.   Of course, we keep sending them back.

Irwin Schiff loses motion to vacate conviction.  Not a great surprise(Jack Townsend)

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There’s no pension tax fairy in San Diego

Friday, March 30th, 2012 by Joe Kristan

Most folks give up on the tooth fairy by Fifth Grade, but many adults never stop believing in the Tax Fairy.  There’s an unquenchable longing for a scheme, a loophole, a little-known code section that will make your taxes go away.  Where there’s a demand, someone will try to provide the supply.   It appears the supply of tax fairies may have gone down by one, based on this Department of Justice Press release:

A federal court has permanently barred Robert Jensen, a certified public accountant from San Diego, from providing tax advice or preparing federal tax returns that illegally attempt to reduce customers’ taxable income, the Justice Department announced today.

 The civil injunction order, to which Jensen agreed without admitting the government’s allegations, prevents Jensen from preparing tax returns that improperly deduct the personal expenses of customers or that attempt to reduce a customer’s taxable income through the unlawful use of pension plans, stock ownership plans or retirement plans.   The order also bars Jensen from providing tax advice to, or preparing the federal tax returns of, any individual or entity that Jensen knows is a customer of co-defendant Scott Waage.

 According to the Feds, Mr. Jensen and Mr. Waage teamed up to peddle various forms of bad deductions to those seeking the Tax Fairy.  The government’s complaint alleges that the pair would set up phony consulting businesses to siphon income out of the taxpayers’ real businesses and to get deductions for taxpayers personal expenses.  The complaint also alleges the use of phony pension plans and employee stock ownership plans, using them to buy high cash-value life insurance policies to return the “plan contributions” to the taxpayers.

The Moral?  When a tax preparer says he can make all of the income of a profitable business go away — that you can have your cake and eat it too — he’s saying he’s the Tax Fairy.  There is no Tax Fairy.

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There’s no Tax Fairy in California

Wednesday, March 21st, 2012 by Joe Kristan

A lot of folks are convinced deep down that they are chumps for paying taxes.  They think that there are people out there who have figured out how to get out of paying taxes legally, or at least safely.  Take this Sioux City man who whose story is told in the North Platte Bulletin:

Insurance agent Patrick L. Bohall of Sioux City, Iowa, was sentenced Monday in United States District Court in Omaha for federal tax evasion…

Bohall is an insurance agent whose business, Legacy Financial Services, is located in South Sioux City, Neb.

Bohall told his tax preparer in 2001 that he was paying too much in taxes and had joined in a plan to learn how to not pay taxes. He was advised by his tax preparer that he had to pay taxes.

Bohall’s 2003 return was prepared in California and contained false statements that erased his taxable income. Bohall did not file any returns or report any income for he 2004-06 tax years.

And who was that miracle California preparer? According to the plea deal, none other than our old friend Joseph Saladino, who first came to our attention in 2005 when he was enjoined from a tax scam promotion.  His web site featured this graphic:

fandp.jpg

Mr. Bohall will be doing without that stuff for about six months.

The Moral?  There is no Tax Fairy, not even in California.  If you have enough income from a job or business to reach taxable levels of income, and you lack the lobbyists to give you special exemptions or tax credits, you will have to pay income tax.  And you don’t have to feel like a chump when you do.

Link: Indictment

Related:

Nope, still no tax fairy

The truth about the Tax Fairy

Buy.com founder learns the truth about the Tax Fairy

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Tax debt settlement outfit achieves pennies on the dollar!

Tuesday, February 7th, 2012 by Joe Kristan

Too bad that deal is for creditors, rather than for the hapless clients who paid cash up front to get J.K. Harris to negotiate away their tax debts with the IRS. If the clients are part of the unsecured creditors group, it’s pennies on the dollars the hard way. J.K. Harris, known for late-night spots and back-section newspaper ads promising miraculous reductions in tax debts, apparently is entering Chapter 7 liquidation, reports the TaxProf (via Peter Pappas).

“J.K. Harris. They’re almost like family to me.”

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Buy.com founder learns the truth about the Tax Fairy

Thursday, January 19th, 2012 by Joe Kristan

There is no tax fairy, despite of the best efforts of big law and accounting firms a decade ago. The founder of Buy.com learned the sad truth the hard way this week when the Tax Court ruled against his “OPIS” tax shelter, marketed by KPMG. The court ruled that the shelter failed to protect Scott Blum from $25.7 million in federal taxes for 1998, 1999 and 2002. It also upheld a $10.2 million penalty assessment. The TaxProf has more.
Cite: Blum, T.C. Memo. 2012-16

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Millennial tax apocolypse

Thursday, January 12th, 2012 by Joe Kristan

The generous tax breaks for multiemployer welfare benefit plans have led to an industry that puts together plans for multiple employers to help executives use them as a tax shelter. There be dragons, as a Tax Court case issued yesterday shows.
A defense industry consultant signed on the Millenium Plan, set up as a section 419A(f)(6) welfare benefit plan to provide death, medical and involuntary severance benefits to employee participants. The IRS decided that the plan looked too much like a tax-free piggybank for the consultant and assessed over $5.5 million in taxes to the contractor and his corporation.
The court found that the plan participants had ready access to their share of plan assets by “voiding” their participation:

Voiding is purportedly allowed only when the employer fails to complete the enrollment, because of mutual mistake of fact, or because of a misrepresentation by an employer’s adviser regarding benefits and features of the Millennium Plan in connection with the employer’s decision to participate. In addition, employers who voided their transactions were required to sign a statement that they would amend any tax returns affected by their participation in the plan, consistent with the voiding of the plan transaction.
Around 30 employers representing approximately 50 covered employees were allowed to void their transactions after they had completed the enrollment process, entered the Millennium Plan, and had their covered employees assigned to a rating group. Some employers had been participating in the Millennium Plan for years at the time their transactions were voided.

The court said that was a fatal problem:

Our decision turns on our conclusion that covered employees in the plan were able to (1) freely void their participation in the plan and have the life insurance policy distributed to them, or (2) receive life benefits at a time of their choosing by “timing” a severance event. Participating employers funneled their pretax business profits into the Millennium Plan to claim tax deductions and covered employees were able to functionally withdraw those amounts at a later time of their choosing. As a result, [the corporation's] contribution to the Millennium Plan should be considered a constructive dividend paid to [the taxpayer], rather than an ordinary and necessary business expense under section 162(a).

The result was $5.7 million in additional taxes and over $870,000 in penalties.
The moral? There is no tax fairy. There is no tax-free way to make unlimited deductible contributions to a tax-sheltered savings plan and retain access and control of the funds for yourself.
Cite: Goyak, T.C. Memo 2012-13
UPDATE: An explanation of tax issues in abusive Sec. 419 plans: Abusive Insurance and Retirement Plans, by Lance Wallach, Journal of Accountancy, September 2008

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