Posts Tagged ‘tax policy’

Tax Roundup, 1/21/14: Weaponizing the IRS. And: whither Section 179?

Tuesday, January 21st, 2014 by Joe Kristan
Lois Lerner, ex-IRS, ex-FEC

Lois Lerner, ex-IRS, ex-FEC

The new, “weaponized” IRS is a focus of Glenn Reynolds, the Instapundit, in a USA Today Column:

Since then, of course, the new “weaponized IRS” has, in fact, come to be seen as illegitimate by many more Americans. I suspect that, over time, this loss of moral legitimacy will cause many to base their tax strategies on what they think they can get away with, not on what they’re entitled to. And when they hear of someone being audited, many Americans will ask not “what did he do wrong?” but “who in government did he offend?”

This is particularly true since the Obama administration is currently changing IRS rules to muzzle Tea Partiers.

While I don’t think it’s that bad yet, it’s headed that way if things don’t change.  And, as Glenn points out, it’s not changing:

Meanwhile, the person chosen to “investigate” the IRS’s targeting of Tea Party groups in 2010-2012 is Barbara Bosserman, a “long-time Obama campaign donor.” So the IRS’s credibility is in no danger of being rebuilt any time soon.

I think this is a terrible and shortsighted mistake by the Administration.  So much of its agenda, especially Obamacare, depends on effective IRS administration, but as the recent budget agreement proved, the GOP isn’t going to fund the IRS when it thinks that’s the same as funding the opposition.

The USA Today piece makes broader points about the effect of the loss of faith in civil servants as apolitical technocrats; read the whole thing.

Via the TaxProf.

Andrew Lundeen at Tax Policy Blog has two new posts on tax reform.  In Tax Reform Should Simplify the Code and Grow the Economy, he says:

We need to eliminate the biases in the code against savings and investment, so individuals have the incentive to add back to the economy, and businesses have the capital to buy new machines, structures, and equipment – all the things that give workers the ability to be more productive and earn higher wages. And we need a tax code that is simple and understandable, so taxpayers know exactly what they pay and why. 

Max Baucus

Max Baucus

We’ve been going the wrong way now for 27 years.  In Responses to Senator Baucus’s Staff Discussion Drafts, he curbs his enthusiasm for the tax reform options offered by outgoing Senate Finance Committee Chairman Baucus:

Generally speaking, we found that the tax reform proposals in these drafts go in the wrong direction. Our modeling shows that they damage economic growth, hurt investment, and, in many instances, violate the principles of sound tax policy: simplicity, transparency, neutrality, and stability.

The post links to a point-by-point examination of the Baucus proposals.

 

 

TaxProf, Martin Luther King, Jr. and the IRS:

This past year, much ado was made about the so-called “IRS-Gate” and concerns that the Obama administration may have used the agency to target Tea Party and other right wing groups. … [W]hat often is not stated during the Martin Luther King Holiday weekend is that King, early in his leadership of the Southern Christian Leadership Conference (SCLC), was routinely subjected to IRS audits of his individual accounts, SCLC accounts as well as accounts of his lawyers, first starting during the administration of President Dwight Eisenhower and continuing through the Kennedy administration.

If you audit me, I shall become more powerful than you can possibly imagine…

Kay Bell, IRS abuse of power, now and in MLK’s day. “Overall, the IRS is paying for its operational indiscretions by receiving less money and more restrictions on how it does spend what funds it has.”

 

Paul Neiffer, Section 179 Update (or Not):

 Here are my official updated odds on when we might know what the actual 2014 Section 179 amounts will be:

By Memorial Day 10 Billion to 1

By Labor Day 10 Million to 1

By the November Mid-Term elections 500 to 1

Between the November Mid-Term Elections and December 15, 2014 25 to 1

After December 15, 2014 and before January 1, 2015 1 to 1

After December 31, 2014 5 to 1

I give about 5 to 1 odds in favor of the current Sec. 179 deduction being extended to $500,000 for 2014, and I think that Paul is right that it is most likely to occur during the lame-duck session.  I think odds are about 50-50 on an extension of 50% bonus depreciation. It’s too bad the Feds have closed Intrade, as this would be a betting market I would like to follow.

 

HelmsleyTaxTrials, Leona Helmsley, Angry Employees Strike Back:

Their mistreatment of employees and squabbles over bills are the stuff of legend and left prosecutors rife with eager witnesses when it came time for trial.

Helmsley was just as arrogant about her taxes, famously telling her housekeeper: “We don’t pay taxes, only the little people pay taxes.”  Helmsley participated in several schemes to avoid paying millions of dollar in income and sales taxes.  

Sometimes that sort of thing comes back and bites you; read the post to see how it bit Helmsley.

 

William Perez on an important topic: Tips for Securely Sending Tax Documents To Your Accountant.  First, don’t send anything with your Social Security Number in an unencrypted email.  Like many firms, Roth & Company offers a secure upload platform to send sensitive information.  If your tax firm has one, use it.  They are the safest way to transmit confidential information and files.

 

Phil Hodgen wonders whether there is a Delay in approving renunciations at State Department?  It’s harder to shoot jaywalkers when they are running away.

Missouri Tax Guy goes back to basics with An Introduction to the Double-Entry Bookkeeping System.  Just remember, Debits are on the door side.

Andrew Mitchel has posted a New Resource Page: 2013 Developments in U.S. International Tax

 

Kay Bell, $4 billion more tax breaks for Boeing from Washington State. Taxing you to give money to folks with good lobbyists.

Jim Maule is appropriately annoyed by the use of the term “IRS Code.”  It’s the Internal Revenue Code, and it’s written by Congress, not the IRS.  Remember that when you vote.

Keith Fogg, Qualified Offers – Is it meaningless to offer what you think a case is worth? (Procedurally Taxing)

Jack Townsend, The New Provision for Tax Restitution and Ex Post Facto

 

The Critical Question: Is Kent Hovind A Tax Protester?  It doesn’t seem like a more promising career path for him than his forays into evolutionary biology.

TaxGrrrl, Hot Tub Tax Machine: News Anchor Takes Plea In Scandal.

 

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

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

Taxpayer Advocate Nina Olsen

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

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

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

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

irs budget cato 20131113

 

Chris Edwards explains:

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

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

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

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

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

 

This will work out well:

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

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

 

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

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

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

cbo table

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

 

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

 

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

 

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

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

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

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

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

 

TaxProf, The IRS Scandal, Day 188

 

Hope lives! 

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

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

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

 

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Tax Roundup, 11/12/13: Mason City is cold edition. But: a reprieve!

Tuesday, November 12th, 2013 by Joe Kristan

The ISU Center for Agricultural Law and Taxation Farm and Urban Tax School makes its Mason City stop today.  7 degrees and sunny.

20131112

But we have a sold-out house today to keep us warm!  We are also sold out for Thursday in Ottumwa.  Meanwhile Paul Neiffer helps with the second day of the show today in Sheldon and tomorrow here.  Seats are going fast for our remaining sessions in Waterloo, Red Oak, Denison and Ames, so register today!  And if you come to one of the shows, please come up and say hi!

 

The first chart for any tax policy debate is in this post from Andrew Lundeen at the Tax Policy Blog,  Government at All Levels Redistributed $2 Trillion in 2012

 givers and takers

 From the study referenced in the post:

As Chart 1 illustrates, the typical family in the lowest 20 percent in 2012 (with market incomes between $0 and $17,104) pays an average of $6,331 in total taxes and receives $33,402 in spending from all levels of government. Thus, the average amount of redistribution to a typical family in the bottom quintile is estimated to be $27,071. The vast majority of this net benefit, a total of $21,158, comes as a result of federal policies.

Before considering any more taxes on “the rich,” it’s worth stopping to understand what is already happening, and to consider that if this isn’t solving the problem, maybe more of the same isn’t the answer.

 

You don’t get a “reprieve” from something you should look forward to: “Iowa gets Obamacare reprieve.”  Coming from Press-citizen.com, the party newspaper of the People’s Republic of Iowa City, that’s probably not the sort of headline to cheer up the administration.

 

train-wreck Megan McArdle, Hope Is All Obamacare Has Left :

When the tech geeks raised concerns about their ability to deliver the website on time, they are reported to have been told “Failure is not an option.” Unfortunately, this is what happens when you say “failure is not an option”: You don’t develop backup plans, which means that your failure may turn into a disaster.

Great idea!

 

Peter Suderman, Time to Start Considering Obamacare’s Worst Case Scenarios (Reason.com):

But it’s time to start considering the worst-case scenarios: that the exchanges continue to malfunction, that plan cancellations go into effect, that insurers see the political winds shifting and stop playing nice with the administration, and that significant numbers of people are left stranded without coverage as a result. Rather than reforming the individual market, which was flawed but did work for some people, Obamacare will have destroyed it and left only dysfunction and chaos in its wake. 

None of this makes me optimistic for a repeal of the inane 3.8% net investment income tax enacted to finance the debacle.  Cleaning up the disaster will be costly, and they’ll need the money for it.

 

Trish McIntire, The New January 21st.  “Despite the delay in the start of the tax season, taxpayers won’t get extra time to file their returns.”

 

Check out Robert D. Flach’s Tuesday Buzz!

Jack Townsend,  IRS Authority to Settle After Referral to DOJ Tax, a discussion of Ron Isley’s tax troubles.

Brian Mahany,  IRS Makes Important Changes For FBAR Appeals – FBAR Lawyer Blog

Fiduciary Income Tax Blog, Valuation of Indirect Ownership Through a Trust

Norton Francis, Narrow Tax Hikes Win Support in Several States (TaxVox)

 

All the news that’s fit to print.  NY Times: Estate Planning for Sex Toys (TaxProf)

News from the Profession.  Someone With Lots of Spare Time Has Doodled Big 4 Stereotypes (Going Concern).

 

 

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Tax Roundup, 10/22/13: Birthday edition! And an unappealing appeal.

Tuesday, October 22nd, 2013 by Joe Kristan

The Internal Revenue Code of 1986 celebrates its 27th birthday today.

President Reagan signs PL 99-514, the Tax Reform Act of 1986.

The authors of the Tax Reform Act of 1986 felt so good about their work amending the Internal Revenue Code of 1954 that they gave it a new name.  And it had some wonderful features compared to what we have now:

- Top marginal rate of 28%, with no stupid phase-outs of itemized deductions or exemptions.

- No capital gain-ordinary income rate differential – tolerable with low marginal rates, and a great simplifier of tax planning.

- It eliminated a whole bunch of complexity, including investment tax credits, and it simplified the life of preparers everywhere by making miscellaneous itemized deductions subject to a 2% of AGI floor, saving us the pain of telling clients they can’t deduct the Swimsuit Issue as an investment expense.

Sure, it had more complexity than I’d care for.  The complicated passive loss rules came in then, on top of existing complicated at-risk rules.  Phase-outs of the passive loss rules imposed hidden marginal tax brackets that helped inspire many awful imitations, like the phase-outs reenacted this year of itemized deductions and personal exemptions.   The 1986 Act brought us inventory capitalization rules, and it left in place the alternative minimum tax.  But at the time, it looked like a good start at much better tax policy.  Now it looks like a high-water mark.

 

Martin SullivanTax Policy In a Knowledge Based Economy (Tax Analysts Blog):

The skeptical accounting profession rarely allows worker training, brand-building, software, and business restructuring to be capitalized, but in so doing it is unwittingly keeping the most important sources of value out of view of managers and stockholders.

Actually, smart managers and investors know about these things, but financial statements aren’t very good at measuring them.

 

20120801-2Tax Court leaps back to work, releasing seven new cases on its first day back after the shutdown.  They include a Judge Holmes case illustrating how good news on the estate tax return can mean bad news on a later income tax return; that case will get its own post this week.

 

TaxGrrrl, Losing Your Identity In Five Easy Steps. Step One: Go To The Doctor.  “And it can all start out with something as simple as handing out your Social Security number at the doctor’s office”

Jason Dinesen, Incorporate Your Life? Not So Fast  “…simply having a business entity DOES NOT make everything in your life tax deductible.”

William Perez, Payment Plan Options. “The IRS will automatically grant a payment plan if your balance owed is under $50,000 and the monthly payments will fully pay the outstanding balance in 72 months or less.”

TaxProf, The IRS Scandal, Day 166

Jack Townsend,  Ex Top UBS Banker Arrested; Likely to be Extradited

Kay Bell, Amazon tax now out in Illinois, coming Nov. 1 to Wisconsin

 

Not only is it the birthday of The Code, it’s Buzz Day at Robert D. Flach’s place!

The Critical Question (Really): Is Obamacare in a Death Spiral? (Megan McArdle): “Another week has passed, which apparently means that it’s time for another terrifying article from Sharon LaFraniere, Ian Austen and Robert Pear on the federal health-care exchanges.”

 

SuccessDetermined Iowa City man may be first in state to buy insurance via glitch-plagued public exchange (Des Moines Register):

Voss said Monday that he tried more than 100 times before finally being able to sign onto healthcare.gov, type in his personal information, compare insurance plans, and purchase a policy. 

I wonder if Amazon.com ever tried that?

 

20121226-1Speaking of train wrecks,  McCoy gives up on train funds (Des Moines Register).  An Iowa legislator gives up on spending $310 million to build a money-losing, slower and more expensive competitor to the Megabus.  Now he can concentrate on getting that downtown zeppelin port that is so critical to the economic future of Des Moines.

 

The Cougars of Madison County. No, Francesca Johnson isn’t back on the prowl.

 

Hey, I said I’m sorry!  That you want to put me in jail.  A New Mexico man convicted of tax crimes and of collecting fraudulent farm payments maybe should have left well enough alone, if you can think a five-year prison sentence is well-enough.  But Billy Melot appealed, with potentially dire consequences.  DailyJournal.net reports:

A southern New Mexico farmer and businessman could face more time in prison because a federal appeals court on Monday tossed out his five-year sentence for failing to pay more than $25 million in federal taxes and fraudulently collecting farm subsidies.

However, the court said a federal district court judge erred in calculating Melot’s sentence by concluding that he had accepted responsibility for his crimes. Judges have the discretion of imposing a less severe sentence when they make that determination.

Under federal sentencing guidelines, the court said, Melot had potentially faced more than 20 years in prison.

The appeals court opinion noted that if Mr. Melot accepted responsibility, he had a funny way of showing it:

Since his conviction, Melot has tenaciously opposed the Government’s efforts to collect the restitution he was ordered to pay by the district court, attempting to thwart the collection of more than $18 million in outstanding income tax assessments and more than $6.5 million in outstanding excise tax assessments. In 2012, a federal magistrate judge issued a certification of criminal contempt against him in the ancillary collection proceedings, finding he “actively and intentionally participated in a scheme to fraudulently create a third party interest in his properties with the intention of defrauding the Court, sabotaging the orderly administration of justice and delaying the United States’ lawful efforts to recover the judgment as ordered by the Court.”

Mr. Melot is 61 years old.  If his sentence is stretched to 20 years, he won’t have much time to enjoy any money he keeps away from the feds.

 

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If taxes are charitable, why can’t I deduct them?

Thursday, May 23rd, 2013 by Joe Kristan

20130522-1Find the error in Victor Fleischer’s statement relating to Apple’s tax planning:

If you think about it, taxes are really just a form of charitable giving. Our goal is to reach a high level of participation from both American and Irish corporations, and your donation in any amount makes a difference. We also welcome any in-kind donations in the form of iPhones and iPads.  My daughter knows how to use them.

Um, no.  As any tax prof would tell you, a gift requires a donative intent, which in turn requires a voluntary transaction.  There is nothing voluntary about giving the government corporate taxes.

From a tax law standpoint, there are all sorts of problems with this analogy, aside from the lack of a charitable deduction for income tax payments.  Starting with:

- A 501(c)(3) charitable organization is not allowed to conduct overt political activity.  If a charity tried to pull the same sort of stunt IRS agents did with the Tea Parties, they’d lose their exemption.

- A charity can’t allow its activities to inure to the benefit of private individuals.  That’s the biggest single thing the government does anymore.    Taking money from struggling young folks to pay Social Security to wealthy Florida retirees wouldn’t cut it in any real charity.  Giving billions to Warren Buffett wouldn’t either.

You can argue some of that goes to deserving poor folks, but when 25% of the biggest income support program is stolen, even that is tough to swallow as a charitable activity.

Jonah Goldberg puts it well:

The fundamental insight of libertarianism is that the government is the government. It cannot be your mommy, your daddy, your big brother, your nanny, your friend, your buddy, your god, your salvation, your church or your conscience. It is the government. A big bureaucracy charged with certain  responsibilities, some of which it is qualified to carry out, many of which it is not.

The government isn’t a charity.  It’s at best a necessary evil, and is mostly a tool for politicians and their enablers to take money from you to buy votes and pass around to the politicians’ friends.

Related:  Should Apple just write a big check to the IRS?

 

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Tax Roundup, 1/11/2013: No, they aren’t paying attention. And it only gets harder.

Friday, January 11th, 2013 by Joe Kristan

20130113-3Don’t forgive them, because they have no idea what they’re doing.  Last night I taught a session on the Fiscal Cliff tax law and the Obamacare Net Investment Income tax to Iowa chapters of the Institute of Management Accountants over the Iowa Cable Network.  Using the controls to talk to remote classrooms in Marshalltown, Dubuque, Marion and Cedar Falls was a challenge, but a piece of cake compared to working with the tax law.

When they passed the Net Investment Income Tax as part of Obamacare, there were only two concerns for the guilty congresscritters:

- Did it apply only to “the rich,” as defined that day?  and

- Did it raise enough revenue for them to help them pretend that they weren’t raising the deficit?

Nobody who voted for the bill took the time to ask: “should we really set up an all-new tax, unlike anything we have ever done before, requiring all new regulations and recordkeeping requirements, just to collect 3.8% of something?”  And that’s exactly what they did.

If you have any illusions that they have any clue what they are doing, a look at the new bracket schedule for 2013 for single filers should cure you of that:

If taxable income is:                 The tax would be:
--------------------                  ----------
Not over $8,925                       10% of taxable income
Over $8,925 but not                   $892.50 plus 15% of the
  over $36,250                           excess over $8,925
Over $36,250 but not                  $4,991.25 plus 25% of the
  over $87,850                           excess over $36,250
Over $87,850 but not                  $17,891.25 plus 28% of the
  over $183,250                          excess over $87,850
Over $183,250 but not                 $44,603.25 plus 33% of the
  over $398,350                          excess over $183,250
Over $398,350 but not                 $115,586.25 plus 35% of the
  over $400,000                          excess over $398,350
Over $400,000                         $116,163.75 plus 39.6% of the
                                         excess over $400,000

Notice something funky about that 35% bracket?  It covers only $1,650.  While you have to earn $215,100 to get through the 33% bracket, you skip through 35% to 39.6% with only $1,650 of additional income.  Why?  Because the administration wanted to only tax “the rich,” and they decided for that day that “rich” starts at $400,000 income, if you are single.

The only sure cure is to make congresscritters, the President, and the Cabinet prepare their own returns in a live webcast, with a comment bar for viewers to mock them.  It would serve them right if they had to do it a la Robert Flach, with no computer.

 

TaxGrrrl,  Tax Code Hits Nearly 4 Million Words, Taxpayer Advocate Calls It Too Complicated:

What could you do with six billion hours?

Think hard. That’s the equivalent of 8,758 lifetimes. Yes, lifetimes.

It’s also how much time taxpayers spend every year trying to comply with tax filing requirements. That, according to the 2012 annual report as prepared by the National Taxpayer Advocate Nina E. Olson.

It’s not getting easier, either.

Martin Sullivan, Tax Reform Muddle (Tax.com):

Having agreed to tax increases, Republicans are now more insistent than ever that tax reform must be revenue neutral.

The big change is from Democrats– who have become so adamant on the need for tax increases in addition to the $600 billion raised by the fiscal cliff deal, and who realize additional rate hikes are absolutely impossible–are hell-bent on preserving the most politically feasible loophole closers for raising revenue.

It’s a hopeless game.  The deficit is too big to deal with by “loophole closers.”  Behind the push to raise taxes by closing loopholes is a delusion that you can pay for our incontinent government spending just by hitting “the rich” harder.  But the rich guy can’t cover the check.  Either spending comes down or everyone pays a lot more tax.

 

 

Nick Kasprak,  Chart: Effects of Marriage on Income and Payroll Tax Liability (Tax Policy Blog)

 20130111-2

 

Deborah Jacobs, A Married Couple’s Guide To Estate Planning (Forbes, via the TaxProf)

Paul Neiffer, Section 179 Can Create a Farm Loss (In Certain Cases)

Kay Bell,  Top taxpayer problem? Continuing tax code complexity

Christopher Bergin,  Permanent Insanity: “Only in Washington would you find folks who would brag that they did a good thing by making permanent an unfair and indecipherable tax system that wastes billions of dollars to administer.” (Tax.com)

Norton Francis, What the Fiscal Cliff Deal Means for the States (TaxVox):

The good news for states is that American Tax Relief Act of 2012 will  end much of the uncertainty that has plagued the income tax code in recent years. No longer will states have to guess what will happen to many provisions of the federal revenue code that were set to expire. The bad news is some states will lose revenue they were counting on from
scheduled changes in the federal estate tax that won’t happen.

Trish McIntire, Refund Loans

Patrick Temple-West,  Public goals, private interests in ‘Fix the Debt’ campaign, and more

Jack Townsend,  Bank Leumi Signals Cooperation with U.S. on Offshore Accounts.  Israili bank ready to spill the beans on U.S. taxpayers with accounts there.

A Friday Buzz from Robert D. Flach.

The Critical Question:  Shipping Wars’ Token Hot Chick Is a Former Accountant? (Going Concern)

 

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Tax Roundup, 12/27/2012: Why the rich don’t like being soaked. And how to make a fortune by copyrighting your name!

Thursday, December 27th, 2012 by Joe Kristan

 

From a Tax Foundation chartbook, “Putting a Face on America’s Tax Returns”

What happens as you ratchet up the top rate. A timely explanation of the effect of raising already high tax rates from Megan McArdle:

Taking your tax rate from 5% to 10% decreases your after tax income by 5.26%.  But by the time your tax rate is 50%, you’re only keeping half of your income.  So increasing the tax rate by 5% decreases your after-tax income by 10%: you used to take home 50 cents out of every dollar, but now you only take home 45 cents.  

If you were surprised that Gerard Depardieu decided to leave France rather than pay the new 70% top rate, think of it this way: the rate increase was only 30%, but it was going to cut his income in half. Yes, that would still leave him with more money than you and I live on.  But people don’t think this way: if the government came and took half your after-tax income away, that would still leave you with more money than a middle-class family in Bangalore lives on, and you would still be hopping mad, not to mention panicking about how the mortgage was going to get paid.  Even if they only took half of your marginal after-tax income away–an extra 50% of every dollar you made over $40,000 say–you would be pretty upset, because you’ve probably already earmarked uses for those dollars.

With the people in the highest-income states already pushing a 50% marginal rate under current law (and also, under what I take to be the negotiation outcome desired by most of the Democratic Party), every 10% tax hike is a 20% decrease in the after-tax value of extra work.

Applying that analysis to Iowa, the combination of the fiscal cliff and the Obamacare 3.8% “net investment income” tax can reduce the after-tax value of additional income of a top-rate Iowa taxpayer by 12.24%  — about 1/8.   For Iowa businesses that pay their taxes on owner returns — that is, partnerships, LLCs and S corporations — that’s a 1/8 reduction in their cash flow, their ability to finance expansion, their ability to service new debt.  It’s also a 1/8 reduction in the returns to taking a chance on a new product, a new location, a new employee.  That makes for fewer chances taken.

Worse, soaking the rich doesn’t even begin to solve the spending problem or close the deficit, no matter how hard you try.  The rich guy isn’t buying.

 

Fiscal Cliff Notes

Veronique de RugyA Little Symbolism to Fight Fiscal Denial (The Corner)

TaxGrrrlTreasury Advises That U.S. Will Hit Its Debt Limit In 5 Days

 

Cara Griffith,  The Promise of Tax Stability (Tax.com).  For one company, anyway; tough for the rest of Oregon.

Peter Reilly,  Retired IRS Officer Launches Petition Against Clergy Tax Benefit

Robert D. FlachWHAT’S NEW FOR NJ INCOME TAXES FOR 2012

Anthony NittiThe Top Ten Tax Cases Of 2012, #1: Obamacare Is Constitutional Because The Individual Insurance Mandate Is Both A Penalty And A Tax. Wait…What?

Romney won?  How You Can Lose Money on Paper And Still Win at Tax Time Like Romney (TaxGrrrl). 

As bad as today’s news is, it could be worse.  And it was, actually, as Don Boudreaux reminds us in  Cataloging Our Progress: Men’s Business Wear (Cafe Hayek)

 

Yeah, that’ll work.  Man jailed in federal tax fraud, bills paper for using his ‘copyrighted’ name.   A convicted tax cheat sent a $6 million invoice to the local paper for using his name twice in a news story reporting his guilty plea on tax charges.  Doesn’t he know that if he collects they’ll send him a 1099? (vindy.com)

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Tax Roundup, 12/7/2012: You can’t soak the rich without soaking employers. And: Baby Insane Crips?

Friday, December 7th, 2012 by Joe Kristan

When you tax “the rich,” you tax business.  That’s not going to help a struggling economy, but that’s where we’re going.  The TaxProf reproduces a great Congressional Budget Office chart that shows how how business income has moved from corporate returns to individual returns, mostly through the use of “pass-through” entities like S corporations, partnerships and LLCs:

 

Remember when the IRS Commissioner said they are up against sophisticated criminals?  Not so much,  From the LA Times:

Authorities arrested 11 people and seized piles of cash, guns and vehicles Thursday following an investigation into an alleged $1-million tax fraud scheme operated by a Long Beach street gang.
Thursday’s arrests were the result of “tedious investigative work,” and targeted the Baby Insane Crips, as well as family members and acquaintances, according to Long Beach Police Chief Jim McDonnell. Gang members allegedly used stolen Social Security numbers and other personal information to file false tax returns and then funneled refunds to family members and acquaintances.

When the “Baby Insane Crips” can defeat your financial controls, your controls aren’t that good.  Related: Russ Fox,  Why Rob Banks?

 

Indictment of St. Louis CPA unsealed.  The indictment of St. Louis-area CPA Frank “Tiger” Zerjav has been made public.   Mr. Zerjav survived an IRS attempt to shut down his practice via civil injunction.  This is much more serious, alleging the use of falsified Quickbooks files to conceal taxable income.

Bill Straub,  5 Ways The Fiscal Cliff Drama Could Play Out. (Via Instapundit)

Anthony Nitti,  The Top Ten Tax Cases Of 2012, #4: S Corporation Reasonable Compensation – How Much Is Enough?.  The much discussed Watson case.

 Jack Townsend,  Is Restitution a Criminal Penalty Requiring the Jury to Speak?

 

Patrick Temple-West,  Some in GOP urge lawmakers to back tax hikes for changes in safety-net programs, and more

David Brunori, The Rich Will Pay for Our Sins.  For now.  But not forever; the rich guy isn’t buying. (Tax.com)

Christopher Bergin,  Fool’s Gold and Loopholes:

There are no silver bullets that can fix the fiscal distress facing our nation. The fact that our politicians are trying to convince us to the contrary is not productive and shows that they are small leaders. Unfortunately for us, the chances that leaders who think small can solve big problems are not good.

It’s not about solving our problems, to them.

 

It would make putting up with the politicians easier, anywayDude, Should Marijuana Be Legalized and Taxed?  (Howard Gleckman,  TaxVox)

That makes it a better Friday: Robert D. Flach’s Buzz, SPECIAL FRIDAY EDITION

 

News you can use: The Simpsons’ Montgomery Burns explains (sorta) the fiscal cliff (Kay Bell)

Cruel and unusual punishment:  Brazil Prison Gang Conducted 10-Hour Conference Call (Via Going Concern).   Egads.  I’d rather face thumbscrews.

If she were in Congress, I would believe it.   Ex-Chelsea selectwoman accused of tax fraud claims she is illiterate.  A novel tax evasion defense.

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Tax Roundup, 12/6/12: Putting the “net” in investment income. And Bar time! Well, Bar Association school time…

Thursday, December 6th, 2012 by Joe Kristan

I speak this afternoon at the Iowa Bar Association Bloethe Tax SchoolI will be talking about “Affordable Healthcare Act for Pass Through Entities” at 3:40.  The newly-released proposed regulations on the 3.8% net investment income tax and the .9% Medicare tax will star.  If any Tax Update readers are there, please say hello if you get a chance.

 

Putting the “Net” in the net investment income tax.  The Obamacare 3.8% on “net investment income” for higher income taxpayers has a strange feature that is highlighted in the newly-released proposed regulations. The tax applies the tax to “Net” investment income to the extent it increases adjusted gross income — not taxable income — over $200,000 for single taxpayers or $250,000 for joint filers.  “Investment Income” for this tax is a new combination of interest, rents, royalties, non-qualified annuities, capital gains and “passive” business income, as from K-1s.

So what does “net” mean? The proposed rules (Proposed Regs. 1.1411-4(f)) say that you reduce income by deductions “allocable” to the investment income. That includes Schedule A deductions for investment expenses, to the extent they exceed the 2% of AGI floor.  It also includes state income taxes “allocable” to passive K-1 income and other “investment” income (cites removed for clarity):

 In the case of taxes that are deductible… and imposed on both gross income (including net gain)/..and gross income…  the portion of the deduction that is properly allocable… may be determined by taxpayers using any reasonable method. For purposes of the prior sentence, an allocation of the deduction based on the ratio of the amount of a taxpayer’s gross income (subject to the tax) to the amount of the taxpayer’s (total) gross income… is an example of a reasonable method.

So even if a taxpayer gets no benefit from a deduction because of alternative minimum tax, it reduces net investment income.  Nothing in the regulations incorporates AMT.  As long as an itemized deduction is allowed for regular tax, then it reduces investment income.  Taxpayers with AMT liability lose the benefit of their state income tax and miscellaneous deductions for most purposes, but not for this silly tax.

By the same token, if a deduction is disallowed for regular tax — by the 2% floor, the passive loss rules, etc. –it does not reduce net investment income. This makes the GOP proposal for a “cap” on itemized deductions that much worse.

 

Raise rates or limit deductions?  Republican Senator Tom Coburn says that he prefers tax rate increases to the deduction cap proposed by some Republicans.  From The Hill:

“Personally, I know we have to raise revenue; I don’t really care which way we do it,” Coburn said during an appearance on MSNBC. “Actually, I would rather see the rates go up than do it the other way, because it gives us greater chance to reform the tax code and broaden the base in the future.”

While I am a doubter of the “need” to raise revenue — we don’t need to do that if we would spend at not-insane levels — I agree that if you increase taxes, rate increases are the way to go.  It keeps the pain simple and honest.  The deduction cap would be much more disruptive to businesses, as owners of pass-through businesses would lose the deduction for much of their state income tax burden.  It would greatly complicate tax planning and have unpredictable consequences for business owners, charities and the housing market.  It would also be horrible to professional gamblers, whose below-the-line loss deductions would be capped, and to investors with substantial below-the-line investment interest expense.  And all just to pretend there is no tax increase.

Of course I have no faith at all that a GOP compromise on tax rates will lead to serious concessions on spending.  And the spending is the problem.

 

TaxGrrrl,  Key GOP Senator Says Yes To Higher Tax Rates In Compromise

Robert D. Flach is not impressed by our leaders:

The continued unmoveable hard line on “resolving” the “fiscal cliff” taken by the two sides is a clear indication that the idiots in Washington do not give a tinker’s damn about the American public.

He’s right.  It’s never been about us.  It’s about power.

Andrew Lundeen,   Fiscal Cliff: Capital Gains and Dividend Tax Increases Pose Greatest Threat to Economy (Tax Policy Blog)

Patrick Temple-West,   GOP in a difficult political spot in tax fight, and more (Tax Break)

 

Howard Gleckman,  How to Cut the Charitable Deduction Without Reducing Giving (TaxVox)

David Brunori,  Note to Everyone: Business Should Not Pay Sales Tax: (Tax.com)

Only bad things happen when businesses pay sales tax. First, the businesses paying the tax pass the burden on to their customers in the form of higher prices. But the tax is hidden. People do not know they are paying it. Politicians, and perhaps the New York Times, may like that lack of transparency, but it is awful government policy. Second, the higher priced products purchased by consumers are often subject to tax. This gives rise to a tax on a tax. That is awful tax policy.  Finally, taxation of business inputs artificially keeps sales tax rates low. People think the sales tax rate is lower than it actually is.  None of this is good.

It’s always best to not hide the taxes.

Cara Griffith,   New York Times Article Misses the Mark on San Francisco Tax Exemption (Tax.com)

Kay Bell,   Many companies paying dividends early; Be sure to plan for taxes on the income

Jana Luttenegger,  Last Minute Charitable Gifts.  (Davis Brown Tax Law Blog).  If they cap itemized deductions, many folks will wish they had given more this year.  This post has some good ideas.

Tax Trials,  Tax Court: No Penalties for Son of Boss Participants

Trish McIntire,   Education Credits Form Changes

I’m way ahead of the science.   Science Says You Should Have Multiple Large Monitors(Going Concern). Too much is almost enough.

My bare-bones workstation.

 

News you can use:  Timesheet Wars: Non-Billable Codes Are Orwellian Busywork (Going Concern)

 

 

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Thoughts on a more business-friendly tax law

Tuesday, November 27th, 2012 by Joe Kristan

I was asked yesterday how the tax law could be made more friendly to small business.  Here is how I answered the question (with some slight editing for clarity in the morning).  I would love readers to chime in via the comments, or for other bloggers to respond in their own posts.

There are a thousand things that could be done, but they fall into just a few categories:

1- Don’t try to micromanage business decisions through the tax law.
2- Remove big penalties for foot-fault violations.
3- Make it easy for non-compliers to come into compliance.
4- Don’t treat the business as a social service agency.
5- Make mistakes matter less through lower rates.
6- Whatever you do, make it simple.
 
If you have a tax law with fewer special favors to industries (green jobs and so on) you can lower the rates for everyone.  If somebody makes an honest mistake, they shouldn’t get clobbered, especially if they can identify and correct the mistake on their own.  And if rates are lower, there’s less incentive to cheat or make solely tax-motivated decisions.
 
For example:  Obamacare has a health-care credit for tax credit small (under 25 full-time equivalent) employers.  It is very complicated, requires careful compliance with non-discrimination rules, and phases out as you grow.  It violates rule 1 by micromanaging the compensation structure of a small business.  It violates rule 4 by making the business the provider of a welfare benefit.  It violates rule 6 by being almost incomprehensibly complex.
 
The deferred comp rules in the tax law (Section 409A) are a great example of bad law.  Enacted to keep Enron from doing what it had already done, it applies as well to every business, long after Enron is a memory.  If you violate a very complex set of deferred comp rules, the employee – and every employee in the plan - can be hit with an income tax and a 20% excise tax on his deferred comp balance — even though he might never receive it.  It violates every rule above, except (maybe) rule 4. 
 
A tax law that followed these would be much easier to obey and much more business-friendly.
 
Thoughts?
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Tax Roundup, 11/26/2012: Is there a good side to tax evasion? Plus more fiscal cliff jumping!

Monday, November 26th, 2012 by Joe Kristan

Via Wikipedia

Is it better to cheat on business taxes than to be out of business?  A British researcher says much of the UK economy is only possible through tax evasion.  From FastCompany.com:

As he and colleagues argue in a recent paper, the informal economy isn’t just for shady figures looking to squeeze out as much profit as possible; in large measure, it’s inhabited by entrepreneurs whose fledgling businesses might simply fail if they played strictly by the rules.

As taxes and regulations get more complicated and difficult to comply with, more businesses will fall on the wrong side of the law (never a good idea, by the way).  The politicians who make compliance prohibitively difficult and expensive will then blame “greed.”

 

That’s why they are called plea “bargains.”  From the Newport Beach Patch:

A 52-year-old woman who pleaded guilty in 2009 in connection with a $2.5-million tax fraud and money laundering scheme that included two Newport Beach properties and was later allowed to withdraw her plea was convicted today following a jury trial.

Safieh Fard had struck a plea bargain in May 2009 with federal prosecutors that recommended a 30-month prison sentence. Now Fard could face up to 20 years in prison, her attorney Correen Ferrentino said.

Sadly, prosecutors can overcharge to force a plea bargain.  Even when a defendant thinks she is innocent, the risk of a long prison sentence can make it hard to keep fighting.   It will be interesting to see how long the sentence turns out.

 

Really?  Not all tax prosecutions are justified?  No.  Tax Analysts today carries an appalling story from New York State (unfortunately available for now only to subscribers) where a small businessman was falsely accused of evading taxes on $1 million of income.  The indictment was based on shockingly lazy investigation; a close reading of the taxpayer’s return alone would have cleared the taxpayer.

It was almost as though the prosecution believed that once the department demonstrated that Monsour had received the money deposited into his accounts, the burden had somehow shifted to Monsour to prove that the receipts were not taxable income. That approach might have applicability in a civil tax audit, but it has no place in a criminal prosecution. In a criminal case, it is always the people’s burden to prove every element of the offense, whether before the grand jury or at trial, and in this case the people had to show that Monsour knowingly and fraudulently filed a false return that misrepresented his income. Showing that he had received money without also showing that the money received was taxable income was not enough, and the prosecution would have known that mistake if Monsour had been alerted to the investigation before he was indicted.

The taxpayer had borrowed money and sold property (reporting the sales properly on his return), accounting for the bank account deposits that led to the indictment.  Those calling for ever-harsher punishment and looser prosecution standards for tax crimes ought to be the first to experience it.

 

Tom Harkin, cliff jumper.  From thefiscaltimes.com:

In a recent call with reporters, Democratic Sen. Tom Harkin of Iowa signaled he was willing to let the country topple over the fiscal cliff unless President Obama and Congress strike a deal to force wealthy Americans to pay more in taxes and that protects Medicare and Medicaid from deep cuts.

“No deal is better than a bad deal, because things will change after Jan. 1, the positions will change,” Harkin explained. “Quite frankly, if we don’t get a good deal, we’ll just take it up in January or February.”

The deal is already bad.  The only question is how much worse it will get.

TaxProf,  Should the Top Marginal Income Tax Rate Be 73 Percent?  Short answer: no.

Martin Sullivan,   Should CEOs Lobby for a Carbon Tax?  (Tax.com) They might as well lobby for an oxygen tax, for all the good it would do.

Jim Maule,   Is Grover Norquist Singing a New Tax Tune?

Maybe not:  Members of Congress Appear Ready to Break With Anti-Tax Pledge As Norquist Doubles Down (TaxGrrrl)

Peter Reilly,  S To LLC As A Fiscal Cliff Acceleration Strategy ?  That means paying tax on all of your built-in gains now, but at a 15% rate.  It’s a strategy only for taxpayers with cash reserves to pay taxes now.  It makes the most sense if a sale is likely in a few years anyway, but at a higher tax rate.  The biggest risk is that the value of the business will go south before you sell the business, and you pay tax on gain that won’t be there when it’s time to cash out.

Howard Gleckman,  What Happens if Congress Extends Tax Cuts for Those Making $500,000?  (TaxVox)  It just changes where the harmful and futile policy begins.

 

That’s one way to use the $5 million lifetime gift exemption before it goes away next year.   Lindsay Lohan gets $100,000 gift from Charlie Sheen to pay toward IRS bill; Sheen now faces estate, gift tax issues  (Kay Bell)

Paul Neiffer,   IRS Bumps 2013 Standard Mileage Rates by a Penny per Mile

Jack Townsend,   The Cheek Defense in IRS Disbarment Proceedings.  Tax protest guru and former IRS agent Joe Banister is barred from practicing before the IRS; he was unable to convince the Ninth Circuit that his belief in the silly “Section 861 argument” is reasonable.

 

News you can use:  SWANS ARE EXPENSIVE! (Robert D. Flach)

I would have read the article, but I decided not to risk it.  Optometrists warn: Don’t stare at your computer screen too long (Radio Iowa, via The Beanwalker)

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Tax Roundup, 10/19/2012: How big can small be? Plus: gift tax annual limit goes to $14,000 in 2013.

Friday, October 19th, 2012 by Joe Kristan

I don’t support increasing taxes on small businesses, as long as they stay that way.  Taxes have become an issue in the race for Congress in Iowa’s 4th district.  Sioux City Journal reports:

Officials with Christie Vilsack’s congressional campaign are asking eight Iowa television stations to pull a political action group advertisement that says Vilsack supports raising taxes on small businesses.

Lawyers for Vilsack, a Democrat, have sent a letter Thursday to television station managers arguing the ad makes the unfounded accusation that Vilsack supports raising taxes on small businesses.

It apparently comes down to what the meaning of “small” is.  From Christie Vilsack’s web site:

Christie Vilsack has proposed allowing the Bush Tax Cuts to expire for those making over a million dollars a year, asking them to pay their fair share. According to the nonpartisan Tax Foundation, as of 2010, less than .1 percent of all income tax filers in the state of Iowa reported an annual income over one million dollars.

That would increase the top tax rate to 39.6% for pass-through businesses successful enough to get their owners to over $1 million in taxable income.   There are plenty of Iowans whose closely-held businesses put them over $1 million.  It’s a small portion of returns filed,  but it’s surely a large portion of Iowa form 1040 business income.  Nationwide, 36% of pass-through income is taxed on returns reporting over $1 million, according to the Tax Foundation.

 

Is a business that makes over $1 million “small?”  Obviously it’s bigger than your office Mary Kay reseller’s business, but they are small compared to publicly-traded companies.  Are you only small until you are successful?   As to whether they are paying their “fair share,” millionaires have an 11% share of national income, but pay 26% of income taxes.   Whether that’s “fair,” like whether a business that makes $1 million is “small,” is inherently a matter of opinion.

 

 Brinkmanship at the fiscal cliff.  Tax Analysts reports ($link):

President Obama will veto any bill that comes before him if it includes an extension of the 2001 and 2003 tax cuts for income exceeding $200,000 for individuals or $250,000 for joint filers, White House spokesman Jay Carney confirmed October 18.

Speaking of taxes on small businesses.

 

More inflation adjustments.  In addition to the new limits for 2013 pension contributions and the new FICA base, the IRS has issued other inflation adjustments (Rev. Proc. 2012-41) for next year.  One key number: the annual exclusion for gift taxes rises to $14,000 per donor, per donee, from $13,000.

 

Tax Prof,    2d Circuit: Denial of Estate Tax Marital Deduction to Same-Sex Couple Violates Equal Protection

Linda Beale,  Another Court Strikes Down DOMA

Robert D. Flach,  2013 INFLATION ADJUSTMENTS

 

Brutal Assault on Reason Watch: 

Obama threatens veto of any ‘fiscal cliff’ bill that doesn’t hike taxes on the rich

Patrick Temple-West,   Essential reading: Officials say Obama could veto a bill blocking ‘fiscal cliff’ without tax hike for rich, and more

TaxGrrrl,   More on Romney’s Tax Returns

Howard Gleckman,   The Real Lesson About Capping Itemized Deductions  (TaxVox)

 

Jim Maule ponders Fishing for Deductions

News you can use:  Why the 2013 Tax Season May Give Me Lots More Gray Hair  (Russ Fox)

 

You can’t make this stuff up.  Tax return numbers, that is.  From the Washington Post:

A local make-up manufacturer who sold lipstick, nail polish and blush to retailers around the world pleaded guilty to tax evasion on Thursday in federal court in Maryland.

Bae Soo “Chris” Chon, the former owner of Mirage Cosmetics in Greenbelt, engaged in a scheme to divert at least $1.8 million from overseas cosmetics sales to foreign bank accounts, according to the plea deal.

The IRS prefers to see your taxable income without the benefit of foundation or blush.

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A step away from the fiscal cliff?

Friday, August 3rd, 2012 by Joe Kristan

Huge parts of the tax law either have technically expired already or will do so at year end, thanks to our congresscritters habit of enacting  tax breaks “temporarily.”  This looming calamity is variously called “Taxmageddon” or the “Fiscal Cliff.”   Congress has no intention of letting these breaks actually expire, but they can pretend the breaks are less expensive than they are under Congressional accounting that way.

That works out fine when they are in a mutual back-scratching mood, but this election year the ‘critters are snarly, and they aren’t getting much done.  That’s why yesterday’s bi-partison vote in the Senate Finance Committee to approve an extenders bill is important — it may signal that at least the normal expiring provisions will see action this year.

Some of the key items included in the Finance Committee bill:

- Extension of the “AMT patch” to keep 20 million or so individuals from facing a tax increase of up to around $8,000 for 2012.

- Extension of the charitable break for conservation easement donations through 2012

- Tax-free IRA distributions for charity through 2012.

- Research tax credits, which expired at the end of 2011.

- Work opportunity credits, which also expired at the end of 2011.

- Extend the $500,000 Sec 179 deduction through 2013.  Current law limits the deduction to $125,000 this year and $25,000 next year.

- Reduction in the built-in gain period for S corporations to five years after the S corporation election.  Former C corporations are subject to a 35% corporate tax on “built-in gains” for the first ten years following their S corporation election.  The bill would make this a five-year period for 2012 and 2013 sales of “built-in gain” property.

- 15-year depreciation for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements placed in service in 2012. 

-And, of course, the key to the entire economy, seven-year depreciation for motorsports entertainment complexes, also known as “racetracks.”

The bill does nothing to address the scheduled increase in top marginal tax rates to 39.6% starting next year, or to mitigate the 3.8% Obamacare surtax on investment income also scheduled to take effect in January.  Even the items in this bill are no sure bet, considering how difficult it is to pass anything this year.  Still, this shows that there may actually be a serious attempt to pass an extender bill this summer.  If they do, it will probably look a lot like this.

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Obamacare: it’s a tax!

Thursday, June 28th, 2012 by Joe Kristan
http://www.rothcpa.com/misc/20090617-2.jpg

Flickr image of “The Ultimate Swiss Army Knife” by redjar

The Supreme Court surprised just about everybody today by holding that the Affordable Care Act was not a permitted exercise of C ongressional Commerce Clause power, but it was still valid as a tax.  That means the Act remains in place unless the other two branches pass a repeal.  As a practical matter, then, nothing changes.  All of the new taxes and penalties — oops, it’s all taxes now — will take effect as scheduled. 

The most important of these from a tax planning point of view may be the Act’s 3.8% tax on “unearned” income. This tax will apply to interest, dividends, rents and capital gains starting in 2013 for taxpayers with AGI over $250,000.  It also applies to “passive” income from pass-through trades or businesses.  Examples will include inactive family owners in a family business.  The law applies the “passive loss” rules in determining whether the 3.8% tax applies.  This will incentivize owners of profitable businesses to claim they are “materially participating” in the business.  Up to now, such taxpayers often didn’t have to take a stand on whether they were passive, as long as the business was profitable.   Look for a lot of family members with big K-1s to start pulling down W-2 income where they never had done so, to  bolster their case for being non-passive.

There is also a .9% additional surtax on salary income and self-employment income when wages exceed $250,000 on a joint return ($200,000 single).  This will increase the attraction of using S corporations and keeping the salary below these thresholds, sending out the rest of the income on the K-1 free from these penalties.

If the bill isn’t repealed, the penalty tax on individuals who fail to buy health insurance will take effect in 2014.  For the first year it applies at the greater of a laughably small $95 per year in 2014, or, if greater, 1% of “household income” — the aggregate incomes of all members of the household required to file tax returns.  That will rise to $695 per year by 2016 or 2.5% of household income, if greater, by 2016.  Strangely, the IRS can’t collect this tax without the taxpayer’s help.  If the taxpayer doesn’t fork it over voluntarily, or have a refund against which to apply it, the IRS can’t use its collection tools — levies, seizures and so on —  to collect it.  That means a lot of people will make sure to fiddle their W-4s  so they never have an overpayment on their 1040s.

 Maybe the most depressing aspect of the decision is the way it seems to endorse using the tax law as the Swiss Army Knife of public policy.  Things that Congress can’t enact any other way are now possible if they can somehow be crammed into the tax law.  The tax code is already groaning under its load of responsibilities for industrial policy, health policy, welfare policy and housing policy, for starters.  The IRS Commissioner is now sort of a super cabinet member with a portfolio that dwarfs most of the “real” cabinet departments.  Of course, the IRS is ill-suited to this role, resulting in poor policy administration and poor tax administration.  Thanks, Justice Roberts!

Related:

Tax Policy Blog: Supreme Court Problematically Defines Individual Mandate as “Tax” and Roundup of Reactions to Supreme Court Health Care Ruling

Althouse: Chief Justice Roberts writes an opinion limiting the commerce power and the spending power.

Philip Klein: The Supreme Court’s Obamacare ruling — abridged

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IRS: you aren’t allowed to escape our trap!

Tuesday, June 19th, 2012 by Joe Kristan

Flickr image courtesy Woodswalker under Creative Commons license

A bunch of McDonalds franchisees in Utah were run in a multy-entity structure: the restaurants were operated in one corporation, while a management company provided payroll, training and benefits services to the restaurants to the operating company.  In 2002 they began working with a consultant who advised them to make an S election for the management company and start an ESOP in it.  The management company also began a non-qualified deferred comp plan for the highly-compensated employees of the managmeent company.

The ink had barely dried on the new structure when the IRS issued new regulations that pretty much wrecked it all.  New rules on S corporation ESOPs, combined with the deferred comp plan, changed everything, as the Tax Court explains (my emphasis):

 On July 21, 2003, the Commissioner issued temporary regulations under which, for the first time, the definition of synthetic equity under section 409(p)(6)(C) included employee balances under nonqualified deferred compensation plans such as the NQDCP which petitioners had established within the management company…

Where the deemed-stock ownership tests of section 409(p) are violated, there are significant consequences to the disqualified persons, to the S corporation, and to the ESOP. Prohibited allocations in favor of disqualified persons are treated as currently taxable to the disqualified persons, sec. 409(p)(2)(A), and excise taxes equal to 50% of the total prohibited allocations are imposed on the S corporation, sec. 4979A. Further, the ESOP will not satisfy the requirements of section 4975(e)(7) and will cease to qualify as an ESOP.

But other than immediate tax, a 50% penalty tax, and ESOP termination, the structure would work just fine.  So the franchisees went back to the drawing board.  They bought the management company stock back from the ESOP. paid out the deferred comp balances of about $3 million, and terminated the ESOP under their own terms.  The taxpayers pretty much undid their plan and went back to their old setup.  But the IRS had another surprise:

On audit respondent determined that petitioners’ July 12, 2004, purchase and acquisition from the ESOP of the stock in the management company occurred for the principal purpose of avoiding or evading taxes by obtaining a loss deduction to which petitioners would not otherwise have been entitled, and respondent disallowed under section 269 the approximate loss deduction of $2,969,000 petitioners claimed.

They weren’t even joking.  Now Sec. 269 is a very obscure and rarely used tool in the IRS terror kit.  In the rare cases when it is used, it usually involves C corporations trying to buy net operating losses or tax credits.  I have never heard of it used on an S corporation, and the Tax Court seemed surprised too:

Respondent acknowledges that because S corporations are passthrough entities for Federal income tax purposes and do not keep their own deductions and losses (i.e., S corporation deductions and losses automatically pass through to the shareholders), it is extremely rare that the Commissioner would seek to make a section 269 adjustment in the context of a taxpayer’s acquisition of an S corporation.

The Tax Court sensibly saw things the taxpayers way.  The judge pointed out that the taxpayers would have been stuck with a bad tax structure caused by IRS rules adopted after they had already set it up (citations omitted):

The above transactions and steps clearly were related and planned as part of an effort to avoid problems created for petitioners by the Commissioner’s temporary regulations, to restructure the management company, and to terminate the ESOP; but they represent valid and real transactions with economic effect that require our recognition as legitimate business transactions.

It’s disturbing to see the IRS try to use Sec. 269 here.  Every ownership structure is tax-motivated in one way or another.  To challenge  a taxpayer’s entity structure is an improperly tax-motivated transaction, absent some weird result like a windfall tax loss or credit, is grossly improper.  This kind of position would result in penalties if taken by a taxpayer.  Taxpayers should be able to collect a similar penalty from the IRS when the agency litigates abusively like this.

Cite: Love, T.C. Memo 2012-166

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Of course high-income people have big capital gains. That’s why they have high incomes.

Tuesday, June 5th, 2012 by Joe Kristan

20080306-2.jpgThe IRS has released statistics on the 2009 400 highest-earning taxpayers.  Janet Novack reports:

Thanks to the stock market crash of 2008, the nation’s 400 highest income taxpayers reported 25% less income in 2009—an average of only $202.4 million each in adjusted gross income each, down from $270.5 million in 2008. The decline was almost entirely due to a drop in the net capital gains they realized.

Nevertheless, the top 400 took a record share of gains in 2009—a stunning 16% of all the net gains reported on 140.5 million individual income tax returns, up from  13% in 2008.  In 2009, the 400’s net gains totaled $37 billion, or $92.6 million apiece, down from $61.5 billion in 2008 and a record $91.4 billion in 2007.

The usual suspects will get their dresses over their heads over this.  “We need to redistribute capital gains to the poor! Or something!  Buffett Rule!”    So let’s re-visit the obvious.

It’s no mystery why the highest-income tax returns have a lot of the capital gains: they have a lot of income because they have big capital gains.  Think about it: when will a farmer or entrepreneur have an income year that stands out from all the others?  The year the business is sold.  What kind of income will that be?  Capital Gain. 

The David Cay Johnstons and Warren Buffetts of the world get all upset because these people, in this year, pay their taxes under the 15% capital gain tax rates.   Of course, that ignores the taxes that have been paid on any C corporation stock that is sold, which represents another impolied 35% tax.  It ignores the amount of capital gain that is attributable to inflation — gain that really is no gain at all.  And it ignores the rate preference that has been accorded to capital gain income over the years, and in most other countries, for sound economic reasons.

The Buffetteers will still argue that no matter the arguments for lower capital gain rates, people with this much income really should pay more.  Yet most people will be in the top 400 only once.  That’s arguing that capital gains should be taxed at a lower rate, except when it really matters.

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That sure looks like a disincentive to me.

Friday, May 25th, 2012 by Joe Kristan

Linda Beale responds to the piece I linked to yesterday about the disincentives to increased income created by the earned income tax credit phaseout. She cites a study that doesn’t really address the question and then says “look, a squirrel” that the real problem is gender bias.

TaxVox links to “A New Urban Institute Calculator Shows What Taxes and Transfers Mean for Low-Income Families” that illustrates the problem Linda Beale waves away:

A single parent in Connecticut with two young children could have received over $18,000 in transfer benefits if she had no earnings and no income, assuming her pre-subsidy rent was $600 per month. But suppose her earnings increased to $17,000 (poverty level) – spread evenly throughout the year – increases in childcare costs (assumed to be $250 per month before subsidies) and payroll taxes would have reduced her earnings by almost $2,000. Income tax credits and transfer benefits would have then added $16,500 – for a total net income of almost $33,000. If her income increased to twice poverty, she’d have to pay almost $5,600 in subsidized child care costs, state income taxes and payroll taxes. She’d receive about $6,400 in tax and transfer benefits – for a net income of $35,000. Thus, doubling her wages from $17,000 to $34,000 resulted in a net change in income of only about $2,000.

To say that result doesn’t discourage work is to say that the poor are bad at math. No, not all of the lost benefits are from the earned income credit phaseout, but that’s an important part of the picture.  The phase out of welfare benefits, including earned income credits, can cause marginal rates at some levels to exceed 100%.  That problem doesn’t go away no matter how much Linda Beale frets over gender bias.  Arnold Kling has made more constructive suggestions:

 There are two potential solutions. One solution is to base eligibility for means-tested benefits on total income, including other government benefits programs. Another approach would be to abolish a lot of specific programs and replace them with generic cash assistance.

 Simply jacking up the benefit levels of existing programs only makes the disincentive problem worse.

 

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When IRS can’t collect $30 million it knows it is owed, maybe it shouldn’t be taking on new assignments

Wednesday, May 23rd, 2012 by Joe Kristan
http://www.rothcpa.com/misc/20090617-2.jpg

Flickr photo of "The ultimate Swiss Army Knife" by redjar

The Des Moines Register this weekend highlighted a case involving an Eastern Iowa trash hauler who the IRS says is behind on tax remittances by $30 million or so.

For two decades, federal authorities have tried unsuccessfully to get James L. Watts to pay his massive tax debts through assessments, liens and garnishments. But the U.S. Justice Department did not try to bring down a hammer on his business practices until late last year

Other problems have yet to be addressed by state and federal authorities, including the fact that Watts’ companies have failed to pay at least 14 judgments in favor of injured workers since 2008, according to the court records and Chris Godfrey, who heads Iowa’s Workers’ Compensation Division.

The result: Garbage truck drivers have been left injured and penniless, taxpayer-owned landfills have been shortchanged thousands in tipping fees, and state coffers have suffered along with the U.S. Treasury.

 The article says the problems go back to the 1960s.  We have discussed this case here.

As tax cases go, this seems rather straightforward.  The tax is assessed, the IRS knows who owes it.  Still, it can’t collect.

Every year Congress gives the IRS more to do.  It has become a sprawling superagency administering programs from industrial policy (R&D credits, export subsidies, manufacturing subsidies) to historic preservation, housing policy to healthcare.  If that’s not enough, the IRS has also eagerly taken on the chore of inventing a new profession of registered tax return preparers. 

Yet the IRS isn’t worth much if it can’t do its real job, assessing and collecting the proper tax.  Policy makers and the IRS Commissioner himself seem oblivious to the idea that making the agency the Swiss Army Knife of public policy reduces its ability to do the one job it should be doing. 

Links:

Order on moion for preliminary injunction
Amended IRS complaint
Answer to amended complaint

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Buying you things with your own money

Monday, May 14th, 2012 by Joe Kristan

Supporters of the “Buffett Rule” aren’t being honest about U.S. Budget problems.  No matter how much you tax the rich, the rich just don’t have the money to pay for all the spending the politicians are doing.  Here is what an honest Buffett Rule fan would say:

Every nation in the world with the kind of welfare state we want for America pays for it by taxing a large majority of its citizens far more heavily than we do. To pretend we can do otherwise is to invite our countrymen to indulge a fantasy rather than call on them to make a serious commitment. Building the welfare state we need means most Americans are going to have to pay significantly higher taxes. No one likes such taxes, of course, but the reality is that they’ll fund an array of government programs that leave all of us better off than we will be with the rudimentary welfare state we’re forced to live with if we insist on a much lower tax burden.

Warren will never say anything of the sort, but that doesn’t change the math: either we spend less or everybody gets taxed more.  The rich guy isn’t buying.

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Tax Roundup, 5/2/2012

Wednesday, May 2nd, 2012 by Joe Kristan

In case you need more evidence that your Iowa public officials hold you in contempt:  “Two decisions made in favor of mobile speed cameras; Supervisors OK them for busy Polk roads, while legislators kill a proposed state ban.”   Remember them in November. (Des Moines Register)

The lush life of the washed-up NFL player: three of them charged in ID-theft tax refund scam.  (Kay Bell, Bankrate.com)

Just another humble municipal public servant: Dixon, Illinois financial officer accused of helping herself to $53 million or so.  Think it ever hit her 1040? (Going Concern)

Sadly, they get to pay taxes for humble municipal public servants steal:The Price of Freedom: What Happens to the Wrongfully Convicted?” (TaxGrrrl)

Commissioner Shulman won’t rest until they’re all gone: Wealthy Americans Queue to Give Up Their Passports“‘There is incredible frustration at the audacity and imperial overreach of this law,’ said David Kuenzi, a tax adviser at Thun Financial Advisors in Madison, Wisconsin, referring to Fatca. “ (Bloomberg)

Death and Income Taxes.  My new post at IowaBiz.com, the Des Moines Business Record group blog for entrepreneurs.

Off the barbie: Crocodile Dundee settles Oz tax bill (Kay Bell)  TaxDood has more.

No.  “Would a Romney Presidency Bring Sweeping Tax Cuts?” With the debt we’ve been accumulating, avoiding tax increases will be an accomplishment. (Anthony Nitti).

Are the new broker basis reporting rules worth it?Five Challenges for the IRS’s New Capital Gains Reporting Rules“(TaxVox)

News you can use: Beating The Possible Estate Tax Increase Without Switching To Cat Food – The Midmill Dilemma.  An issue for folks with net worth of $4 million to $14 million. (Peter J. Reilly)

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