Flickr image by Christian under Creative Commons license.
The IRS had good news for many Americans owning property in Mexico. In Rev. Rul. 2013-14, the IRS ruled that a “fideicomiso” land trust enabling Americans to hold residential property in parts of Mexico is not a trust for U.S. tax purposes. This means taxpayers who haven’t been reporting these as trusts on Form 3520 aren’t exposed to the $10,000 annual penalty that applies to taxpayers who fail to report their foreign trusts.
Don’t settle for just bad enough. The IRS: It’s Bad Enough (Christopher Bergin, Tax Analysts Blog).
The IRS is seriously and dangerously broken. This is not only unfair to the many dedicated public servants at the IRS; it’s unfair to all of us. Get to the truth. Arbitrarily punishing the IRS isn’t going to help any more than blindly defending the agency. The IRS needs fixing and it needs it now, and that starts with new and strong leadership inside the agency, and a President who is willing to spend the political capital on IRS reform. We don’t have that President. As for the Republicans, they’d rather turn the IRS into Monica Lewinsky.
Somehow I don’t think the IRS will ever be that cooperative.
We were happy to pay him, it was some of his best work. Another British filmmaker faces jail time for scamming the U.K. film tax credit system in making a film that never made it to the screen, reports the Express:
The scam included a bogus invoice suggesting Kill Bill star Carradine was paid more than £400,000 for 13 days worth of work, even though he had died two weeks prior to the date stamped on the notice.
This is the second criminal film project to hit the news in the U.K.; another one hilariously involved a film thrown together when the operators sensed the authorities were catching on to their scam. Meanwhile twofilmmakers are serving out their 10-year sentences for scamming the Iowa film credit program. You’d almost think maybe these film credits are just a scam entirely.
If Iowa’s income tax were a car, it would look like this.
The Iowa General Assembly nears the end of its annual rampage. While it finally did something to improve a bad commercial property tax system, it managed to make an already awful income tax a little worse.
The Iowa Senate cleared a property tax plan (SF 295) yesterday to reduce commercial property assessments by 10%, with additional property tax credits for smaller businesses. Unfortunately, the price was to more than double Iowa’s version of the fraud-plagued Earned Income Tax Credit and, it appears, to clutter up the 1040 with additional petty tax credits — those these provisions are apparently part of a separate bill.
As if that weren’t enough abuse to the income tax, the Senate also increased Iowa’s tax credit corporate welfare budget by $50 million (HF 620) by increasing the amount of tax credits that the economic development bureacracy can hand out. They sweetened the corporate welfare pot by enabling the diversion of employee withholding to local crony capitalist slush funds economic development funds.
Another bill, HF 625, increased the popular school tuition credit, a poor substitute for true school choice.
While the politicians will pat themselves vigorously on the back, the net result isn’t very exciting. Yes, lower rates for commercial property are needed. But now Iowa’s dysfunctional income tax is larded with even more corrupt special interest favors, which will make it that much harder to ever enact a system that makes sense for taxpayers without lobbyists and connections.
Our average combined rate of 39.1 percent is the highest in the industrialized world. In an increasingly globalized world, this matters more today than it did the last time we reformed the code in 1986. Today the U.S. has to compete with countries around the globe who are constantly improving their tax codes. When the U.S. fails to do so itself, American consumers, workers, and shareholders lose out.
Politicians created the current corporate tax system and the current system is broken. If you are going to set out a menu of options for corporations to reduce their tax burden, don’t be surprised or upset that corporations take advantage of them.
Winston Churchill said that Americans can be counted on to do the right thing, after we have exhausted all other possibilities. He might have added that we usually start with the least direct and most complex approach. So it is with the energy tax policy expressed in President Obama’s FY 2014 budget.
I like this sentence: “By their nature, tax credits add complexity to the law and often reward behavior that would occur even without the credits.”
So far two clients have contacted me to report an issue – one with a 2011 refund andone with a 2012 refund. In both cases the refund was not directly deposited to the requested account. Instead it was applied to the subsequent year’s estimated tax. It was as if the taxpayer, or I, had entered the full amount of the refund on Line 75, although we clearly did not.
This isn’t a problem I have seen. Robert famously doesn’t e-file his returns. I wonder if it’s a simple keypunch error at the service center.
The legal business must really be getting tough, if lawyers have to resort to the lamest lame tax fraud scheme out there. A Monroe, Louisiana attorney named Francis Broussard has pleaded guilty to attempting to claim over $9 million through the “1099-OID” fraud. From thenewsstar.com:
According to the Stipulated Factual Basis in the plea agreement, Broussard, who has been licensed to practice law in Louisiana since 1986, had his accountant prepare his 2005 through 2007 tax returns, but the defendant never filed them. Broussard did present the documents to various financial institutions in efforts to obtain personal loans and other types of financing. In 2009, the defendant went to a different tax preparer to have his personal tax returns prepared for 2005 through 2008. The defendant brought already prepared federal tax returns along with a separate piece of paper with a set of numbers on it. The defendant instructed the preparer to use the set of numbers on Forms 1099-Original Issue Discount (OID) and on the Schedule B, Interest Income section of the form. The defendant’s fraudulent claim is based on the OID interest income.
The 1099-OID scheme is, to the extent it is coherent at all, based on the idea that government has a big cash stash for each of us. They don’t want us to know about it, goes the theory, but we can tap into it if we just fill out the right tax forms. It’s not surprising that people fall for it — heck, we fall for big delusions every time we vote — but it is surprising that a lawyer would give such a preposterous scheme a try.
TaxProf, TIGTA: IRS Fails to Comply With Mandated Reduction in Improper Payments — 25% EITC Fraud Costs $14 Billion/Year. The earned income tax credit is a fraud magnet because it is “refundable” — if it exceeds your tax for the year, the IRS writes you a check. That makes it a welfare program run through the tax system. EIC advocates say it is a critical help for struggling families, but when that much is stolen from the program in a year, you have to think there is a better way.
Just because an LLC is taxed like a partnership doesn’t mean that every LLC owner can act like a general partner, as Colleen MacRaeexplains:
Last week the Iowa Court of Appeals in Three Minnows, LLC v. Cream LLC, held that a non-managing member did not have the authority to bind an LLC to a contract the member signed on behalf of the limited liability company.
Kyle Pomerleau, TPC, What About the “Pass-Throughs?”. (Tax Policy Blog). Measuring business taxes needs to look beyond corporation taxes when most businesses are taxed on 1040s.
David Cay Johnston, Promises, Promises(Tax.com). “Candidate Obama promised in 2008 to reform the Alternative Minimum Tax, and President Obama promised at least an honest accounting in his first budget, but his proposed budget for Fiscal 2014 is silent on the issue.”
Radio Iowa runs with this headline ”$8.7 million from “Development Fund” creates 600+ jobs.” This headline arises out a “study” paid for by the economic development bureaucracy (meaning: taxpayers) to demonstrate the tremendous job-creating skills of people who give your money to other people. How did this study demonstrate this job creation?
By assuming it.
From the “study”:
A survey of past recipients of Demonstration Fund investments was conducted by the Iowa Innovation Corporation to determine, among other things, how large these companies are now as compared to their pre-investment levels. This growth in size – in annual revenues and in head count – can be attributed in part to the involvement of and investment by the Demonstration Fund.
Furthermore, the resulting economic impact is greater than the direct increase in expenditures and head count, since those increases lead to a series of spillover effects, whereby the impact of new company spending and employee earnings ripples through local economies and supports additional economic activity and job creation. Job impact estimates are determined by using standard input-output methodologies and multipliers, as provided by the US Department of Commerce.
- that the businesses and jobs wouldn’t happen without the wonderful effects of your money being directed by politicians to those businesses.
- that the money wouldn’t have also generated jobs if it had been spent elsewhere.
That’s the same kind of thinking behind the 2009 stimulus spending spree. The results were less than assumed. The dark line is what government projected that spending would do to unemployment, using “standard multipliers.” The lighter blue line was the grim fate awaiting us absent a government binge. The red dots are the actual post-binge unemployment rates.
The study does not have the two words that could have given it credibility: “opportunity cost.” They assume that the money left in the hands of taxpayers would have done nothing. But it would have been spent elsewhere, undirected by politicians; it would have bought things, creating profits and jobs. But as they would have gone unclaimed by economic development officials, no press conference could have been called, so they don’t count.
Obama consistently ignores the statutory timeline for releasing his budget, and this year is the latest he has ever put forward a fiscal proposal. On all things administrative, the president is frequently dilatory. But those waiting with bated breath for Obama’s proposals will be disappointed — the budget will be more of the same and has little chance of actually being passed or even taken up by Congress.
Tax Freedom Day for Iowans will arrive April 9, according to the Tax Foundation. That’s nine days sooner than for the whole country. From the Tax Policy Blog:
Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for the year. A vivid, calendar-based illustration of the cost of government, Tax Freedom Day divides all federal, state, and local taxes by the nation’s income.
In 2013, Americans will pay $2.76 trillion in federal taxes and $1.45 trillion in state taxes, for a total tax bill of $4.22 trillion, or 29.4 percent of income. April 18 is 108 days, or 29.4 percent, into the year. Americans will spend more in taxes in 2013 than they will on food, housing, and clothing combined.
You can find Tax Freedom Day for your state from this Tax Foundation Map:
The national Tax Freedom Day is five days later than last year:
Tax Freedom Day is five days later than last year, due mainly to the fiscal cliff deal that raised federal taxes on individual income and payroll. Additionally, the Affordable Care Act’s investment tax and excise tax went into effect.
But cheer up! If taxes were high enough to pay for all government spending without borrowing, it wouldn’t be until May 9.
TaxProf, ESPN: Athletes’ Charities Fall Short of IRS, Nonprofit Standards. Chis Zorich might agree. Actually, the arguments against athletes setting up their own charitable foundations are the same as those for anybody else. They take more work and expertise to run than most people realize. Compliance with federal tax laws and state laws can be costly. It’s easy to get into trouble with them, like Mr. Zorich did. It’s much wiser for athletes with a charitable interest to work with an established charity that knows what it’s doing.
Jason Dinesen, Taxpayer Identity Theft — Part 14 . The latest adventures in trying to get the IRS to pay the refund of his client, an identity theft victim, for 2010. She may have it in “another 6-8 weeks.” We’ll see.
For a tax blogger, people like Richard Hatch are wonderful. Hatch, for those who don’t remember, was the winner of the first Survivor and won $1 million. About 300 million individuals worldwide saw Hatch take down the $1 million.
Hatch received a Form 1099-MISC for his winnings. In the United States, winnings from contests are taxable. Hatch claims that CBS and/or the producers of Survivor promised him that they would pay his taxes. (Both CBS and the producers of Survivor deny this charge.)
Of course Mr. Hatch failed to pay the taxes on income he earned in front of millions, serving a prison sentence as a result. Sometimes watching somebody else get into real trouble can be instructive.
With less than three weeks left in filing season, the US Federal Circuit Court of Appeals has denied the IRS attempt to overturn the injunction against their preparer regulation scheme. From the Wall Street Journal Total Return blog:
This doesn’t mean the IRS has permanently lost its case, but it does mean that the IRS cannot move forward with its power grab unless and until it convinces the appeals court that it has the authority to regulate preparers.
Meanwhile, filing season continues, with no evidence that taxpayers have been harmed by the availability of preparers who haven’t passed an IRS open-book exam on Publication 17.
Iowa preparer indicted – for helping clients report too much income. From KCRG.com (my emphasis):
Keith Rath, of Shellsburg, was arrested last week by IRS agents after a grand jury indicted him on eight counts of aiding in the preparation and presentation of a false tax return.
The indictment says that on eight occasions over the years 2008, 2009 and 2010, Rath helped clients falsely claim thousands of dollars in business income that he knew they did not earn.
Mr. Rath has pleaded not guilty.
You might wonder why anyone would claim business income they didn’t earn. The answer, of course, would be to claim refundable earned income tax credits. A taxpayer with no “earned income” is ineligible for the credit. The EITC is “refundable,” which means that when there is the credit exceeds the computed tax, the IRS will send you a check for the difference. By reporting imaginary Schedule C income, taxpayers can (illegally) increase their refund check.
In fact, the OECD itself recently issued a report – known as the BEPS report – on how these techniques create base erosion and profit shifting. The problem is so serious, according to the report, “What is at stake is the integrity of the corporate income tax.”
The “integrity of the corporate income tax” is in the third aisle next to the chastity of the bordello.
Flickr Image courtisy Llima under Creative Commons license
If you are going to say the dog ate your tax records, make sure you have a dog. A New Jersey man was having a hard time coming up with records supporting his deductions in Tax Court. He blamed a fire. The success of the argument can be guessed from the Tax Court’s discussion of “Petitioner’s Alleged Fire”:
The circumstances surrounding petitioner’s purported fire are vague, and he has offered no evidence, apart from his testimony, that a fire occurred and that his 2006 tax records were destroyed in such a fire. Significantly, he failed to introduce insurance documentation or third-party testimony describing the alleged events or the extent of any fire.
The Tax Court said the man couldn’t support his deductions.
The Moral? Back up your work. And if you are going to have a fire, something needs to actually burn. (Cite: Mears, T.C. Memo 2013-54)
It looks like the dreaded automatic “sequestration” spending cuts are going to happen, so there is a flurry of proposals to stop this sliver of random spending discipline:
Before earmarking what we will do with the money from limits on chimerical loopholes, our leaders need to clear the path for the painful process of broadening the tax base. President Obama has now poisoned the well by turning Republicans’ tax reform instincts against them. If they were to put any revenue increases on the table, the President would claim the proposals have the Republican seal of approval and incorporate them into his tax hike plans.
At the same time Republicans tax reform strategy is wearing thin. Their extravagant claims about cutting the top individual rates below 30 percent are just hollow speechifying as long as they refuse to put specific revenue-raisers on the table.
Simpson-Bowles is just another deficit reduction plan — and a politically infeasible one at that. Its authors want to make it seem grander by attaching tax reform to it, just like Obama wanted his own proposals (which simply include ways to raise revenue that Democrats have proposed ad infinitum over the years) to sound better when he mentioned tax reform at least three times during the State of the Union. But what they are offering isn’t comprehensive enough to qualify as true tax reform. Deficit reduction has its place, but conflating it with tax reform will stall whatever momentum people like Camp are trying to create for a true tax system overhaul.
High taxes are good for us, so infinite taxes will make us perfect. The high-tax advocacy group Citizens for Budget and Policy Priorities has generated a paper that says that state tax cuts do no good:
This paper argues that state personal income tax cuts won’t help small businesses create jobs, and in fact could harm the ability of the small-business sector to contribute to economic growth. For all the reasons stated in this paper, the converse is also true: personal income tax increases, including those on the highest earners, won’t harm small-business job creation.
Really? There is no level of taxation that would discourage economic activity? There is no level of tax increase that would cause economic activity to be located in a neighboring state with lower taxes?
The paper makes the same mistake as the guy who drowned trying to wade across the river that was only two feet deep, on average. You can see it on the headings of the paper: “The vast majority of those who would get a personal income tax cut are in no position to create small-business jobs.” “Most small businesses make too little money for tax cuts to produce enough income to pay new employees.” “Most small business owners are not significant ‘job creators’ and have no plans to be.”
This is the same logic we heard when we were told that individual tax increases wouldn’t hurt business because most small businesses wouldn’t be affected. When you define “small business” to include your office Avon Lady and a manufacturer with dozens or hundreds of employees, of course “most” businesses won’t hire more if taxes are lower. Just the ones that matter.
When you measure by amount of income, the amount of business affected by individual rates is huge:
Sure, relatively few businesses achieve enough success to hire a lot of employees. Yet some do, and they do a lot of hiring. And, contrary to the CBPP paper, their ability to expand does shrink if they have to pay more taxes. As a tax accountant, it’s part of the world I live in. Prices matter in making decisions — including the price of living, doing business and paying taxes in a state. Any argument to the contrary has to overcome the basic rule of economics that incentives matter.
How H&R Block guy got to write preparer regs. Civil Service! Tim Carney reports:
In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a “co-leader” (in the words of an IRS spokesman) in drafting new regulations for tax preparers.
This seems to clash with President Obama’s executive order barring appointees from working on regulations directly affecting their former employers.
But thanks to a fine legal distinction, these rules didn’t cover Ernst. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” an IRS spokesman wrote me. “The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees.”
Nobody here but us chickens.
Jason Dinesen has a new installment about his client whose identity was stolen in the ID theft epidemic that really got rolling while the IRS was busy regulating preparers. “If you hired the best comedy writers and satirists in Hollywood, they couldn’t come up with a more farcical script about government ineptness.”
A new working paper recently released by the Mercatus Center at George Mason University… finds that contrary to conventional wisdom, sin taxes are often not used to correct externalities but rather for general fund spending. My take on that is politicians don’t really care about externalities. They would like to raise money from people whose activities they despise. The report also found that the goal of “sin taxes” has changed from correcting market failures to protecting consumers from their own choices. That is, people are too stupid to run their own lives and they need help. Finally, the report finds that sin taxes are regressive, i.e., they punish the poor. Unfortunately, my liberal friends never get exercised over this issue. Maybe it’s as the great PJ O’Rourke surmised, liberals hate poor people.
If they would just not wear those icky Wal-Mart clothes and watch their weight, like they tell them to… (Tax.com)
Even accepting that he spent 520 hours working on his own properties, he still lost. Two of the properties were short-term vacation rentals and one was being readied for sale. The time spent on those properties could not be grouped with the time spent on properties dedicated to long term rentals.
When a convicted criminal feels he has been ill-used by an accomplice, the normal recourse tends to involve unpleasant events in the prison gallery. Lawyers are rarely consulted. But when international tax cheating is involved, it apparently works differently.
A group of clients of Swiss bank UBS who claim that bad things happened to them as a result of their Swiss accounts sued UBS. Seventh Circuit appeals judge Posner was distinctly unsympathetic (my emphasis):
The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn’t have to acknowledge having accounts with UBS. They don’t make any of these feeble arguments. They do argue, as we’ll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice.
While the IRS offshore compliance programs have abused many innocent Americans who have foot-fault violations, that doesn’t appear to be the case here. A U.S. resident who set up a Swiss bank account probably didn’t do so to ensure tax compliance.
At worst, UBS, as we’re about to see, violated an agreement with the IRS designed to prevent the kind of evasion that the plaintiffs engaged in. That might conceivably make UBS an aider or abettor of the plaintiffs’s tax evasion and so make this case a distant relative to Everet v. Williams (Ex. 1725), better known as The Highwayman’s Case and eventually reported under that name in 9 L.Q. Rev. 197 (1893). A highwayman had sued his partner in crime for an accounting of the illegal profits of their criminal activity. The court refused to adjudicate the case, and both parties were hanged. Minus the hanging and with certain exceptions (such as contribution and indemnity) irrelevant to this case, the principle enunciated in The Highwayman’s Case applies to accomplices in civil wrongdoing, as noted in our recent decision in Schlueter v. Latek, 683 F.3d 350, 355-56 (7th Cir. 2012). In The Highwayman’s Case one accomplice was seeking a bigger share of the profit from the crime from the other one; here one accomplice is seeking a smaller share of the costs of the crime from the other one. The principle is the same; the law leaves the quarreling accomplices where it finds them.
The moral? Your banker isn’t your tax advisor, and when you are cheating, you are on your own. At least in Judge Posner’s court.
Overwhelming? A Tax Analysts story on the fallout from the Loving decision overturning the IRS preparer regulation program reports:
“There is overwhelming support for registration” among EAs, said Frank Degen, president of the National Association of Enrolled Agents. While preparers are watching to see what an appeals court will do — as the IRS said it would file an appeal soon — “most practitioners are just interested in cranking out those 1040s right now,” Degen said.
I’d want to see some polling showing that “overwhelming” support. The preparer regulation program strikes me as potentially fatal for the Enrolled Agent brand. EA’s, who have to pass a much stricter test and more stringent continuing education requirements than the registered preparers would have to, already have difficulty marketing their additional qualification. The IRS blessing of a competing bargain brand could easily bury the EA designation. At the very least, I see no overwhelming support for the preparer registration program from EA-bloggers Jason Dinesen and Russ Fox.
Even if seemingly everything goes right – in economic terms and in political terms – we are still on the edge of dangerously high debt and deficit levels with little room to spare.
In 2012, the IRS says its investigations and in-house filtering systems prevented $20 billion in would-be fraudulent refunds, up from $14 billion the year before. But [Acting IRS Commissioner] Miller acknowledged that thieves still get away with stealing numerous tax refunds, although the IRS could not provide exact loss figures.
“In terms of how much got past us, we’re quite sure some did,” Miller told reporters in a conference call. “I know it doesn’t approach the number that we stopped.”
How much might that be? Maybe $5 billion a year, maybe more. That’s means about 20% of the fraud gets through. If your “in-house filter” let 1/5 of the grounds of your coffee into the pot, you’d change filters.
This is the first highly-publicized nationwide IRS crackdown on identity theft, years after the problem began to spiral out of control. It’s surely coincidence, but it almost is as if the IRS, now that it has been barred from it’s preparer regulation power grab, has decided that maybe it really should do something about ID theft after all.
DES MOINES – The first bill the Iowa Legislature will send to the governor this year will align the Iowa and federal tax codes, a move that will reduce the amount of taxes Iowans pay to the state.
Although Republican Gov. Terry Branstad will thoroughly review the legislation, his spokesman said the governor supports the intent of Senate File 106 “and will likely support it.”
That’s good news. The sooner he signs it, the sooner the state can begin processing 2012 returns with Section 179 deductions, educator expenses, and a number of other provisions affected by the Fiscal Cliff legislation.
Up until now, I’ve given the President the benefit of the doubt about reforming our broken tax system. I just didn’t think tax reform was a big issue for his administraiton. But now I’m beginning to think he doesn’t care about tax policy at all.
What was the tip-off?
No matter the fiscal crisis, the President never misses an opportunity to propose tax increases on “the fat cats.” To the President, the fat cats are the people and the businesses he thinks can pay a “little more” to support their government. I’m not sure I buy his definition of fat cat. But I certainly don’t buy his definition of tax reform. Tax reform is about building a tax system that is fairer, simpler, and more economically efficient. If in the process it raises revenue, I’m fine with that, but I don’t think the primary goal of tax reform is to wring more money from the well-to-do simply because they are doing better than you are.
It’s been blindingly obvious from the beginning that the President has no interest in tax policy. Look at his record:
- Increases in top marginal rates, which creates incentives for more loophole-carving.
And his big current proposals are to limit deductions for corporate jets and screwing around with how private equity is taxed — symbolic and political gestures that would make the tax law even more complex. Any belief that the Obama administration cares a fig about tax reform requires more unfounded faith than a fourth marriage.
Central Iowa Culture Watch. The State Fairgrounds in Des Moines hosts the cultural event of the season this weekend: the Blue Ribbon Bacon Festival. Tickets routinely sell out in minutes, so if you have to ask, you can’t go. What will you miss? KCCI.com reports:
Start with the dress. It is made of real bacon, created by an East Des Moines dressmaker – and it is actually worn by the Bacon Queen…
“It wildly surpassed anything I thought was achievable. I mean, look at it, it sparkles,” said Porter.
Iowa legislature goes 0-for-January. The Iowa General Assembly has been completed the first three weeks of its 2013 session without settling what Iowa’s tax law is for last year. The legislation needed to update Iowa’s 2012 tax law for the retroactive federal changes enacted in the Fiscal Cliff bill at the beginning of this year hasn’t cleared either house of the legislature. The Senate Ways and Means Committee at least moved its bill (SF 106) out of committee Wednesday, while House Ways and Means hasn’t even done that much with its bill (HF 110)
Many Iowans were affected by the retroactive changes, including educators and people who made energy-saving home improvements. Almost all businesses are affected by the Federal extension of $500,000 Section 179 expensing of depreciable property for 2012. Yet these taxpayers can’t complete their Iowa 2012 tax returns until the legislature decides what parts of the federal changes to accept.
The silliest part: we pretty much know what the bill will look like. It’s almost certain that it will adopt federal Section 179 rules and the other “extender” rules, without adopting federal “bonus depreciation.” That means there’s no reason to dawdle. But dawdle they do.
50 years for Wasendorf. The Wasll Street Journal reports:
Russell Wasendorf Sr., was sentenced to the maximum 50 years in jail after admitting to orchestrating a fraud at his futures brokerage and misleading regulators for almost 20 years.
Mr. Wasendorf, 64 years old, pleaded guilty last September to the fraud at Peregrine Financial Group Inc. that federal prosecutors said had cost clients $215.5 million and masked a business that never was profitable. He also was ordered to pay the full amount of missing funds in restitution.
Mr. Wasendorf got away with it by forging paper bank statements for the regulators and auditors. The scam blew up when Peregrine was forced to move to electronic account verification. Sadly, the chances of full restitution being paid to his victims are less than the chances he will walk out of prison at the end of his sentence.
The IRS also claimed that it would suffer unspecified “costs associated with . . . finding other positions for the 167 Service employees currently working on the return preparer project.” [Institute for Justice attorney Dan] Alban noted, in response, that just over two weeks ago, the IRS complained about understaffing, since “[o]verall full-time staffing has declined by more than 8% over the last two years, and staffing for key enforcement occupations fell nearly 6% in the past year.” You’d think that the IRS would welcome, not rue, the idea of having nearly 200 employees available for other tasks – like answering the phone (at current staff levels, they only do that about 70% of the time).
The preparer regulation program has always seemed a frivolous use of IRS resources when tax complexity and identity-theft fraud are making the tax law almost impossible to administer.
I hate extra apostrophes. Careful Tax Update readers know that I have a terrible habit of inserting extra apostrophes, creating an unintended possessive. I know the rules, but my fingers betray me when typing. Fortunately I can easily change a blog post to turn “it’s” to “its.” Not everybody is so fortunate.
Unless, of course, Steven owns “Steven’s” building.
To make ends meet, both parties agree, spending must be drastically cut. Under the White House budget proposal, discretionary spending on everything except the military is projected to shrink to its smallest share of the economy since the Eisenhower administration by the beginning of the next decade. Though he has resisted Republican demands to slash entitlements, President Obama remains willing to look for further savings from Medicare.
This is not, however, the only option we have. There is an alternative: raising more money from all taxpayers, including the middle class.
Nobody wants to talk about this. … Yet Americans would benefit from a discussion of this possibility.
It’s not true that “both parties agree” that spending must be drastically cut. It’s not clear that either party, as a whole, admits it, and at least one party remains in firm denial. The President’s campaign was all about spending money and sending the bill to the rich guy. Still, it’s nice that finally somebody at the New York Times admits that the rich guy isn’t buying. He can’t.
Customer service at the Internal Revenue Service is dismal and deteriorating. (Only 68% of telephone callers who wanted to talk to a human at the IRS last tax filing season eached one, and then only after an average 17 minute wait.) The epidemic of identity theft refund fraud hasn’t yet been contained. Hope for a major reform that might simplify the tax code is waning.
The article also has some serious nonsense about last week’s ruling shutting down the IRS preparer regulation power grab:
“If the injunction stands, the taxpayers of the United States will be grievously harmed,” IRS National Taxpayer Advocate Nina E. Olson told Forbes. “The practical effect of not having some kind of consumer protection for taxpayers going to return preparers is enormous. And I say that seeing all the return preparer fraud, and the return preparer negligence, and the return preparer inadvertent mistakes that happen.”
Enormous? More like what we did forever until two years ago. If anybody has evidence that last year’s tax preparers were significantly more accomplished and accurate than they were before the regulations, they haven’t shared it. And the idea that the RTRP literacy competency test and minimal CPE requirement would have changed that is silly.
Ms. Olson believes that depriving consumers of choices in preparers is in their interest because the diminished choices would be better. That flies in the face of all we know about regulation. The net result would be higher prices, driving more taxpayers to do their returns and driving some on the margins out of the system altogether, while sending more business to the big franchise tax prep outfits.
While I agree that having the Internal Revenue Service regulate tax preparers is not the best option – it is without a doubt a far superior option to having Congress legislate regulation. My opinion of the intelligence, competence, and ability, or rather lack of intelligence, competence, and ability, of the current members of Congress is well known.
The optimal source of tax preparer regulation/licensure/certification, whether mandatory or voluntary, would be an independent industry-based organization, not unlike the AICPA or ABA, such as the National Institute of Registered Tax Return Preparers that I have proposed.
Robert also calls me out:
As I have asked in response to Joe’s assertion, would you want a “casual” electrician wiring your kitchen, or a “casual” dentist filling a cavity, or a “casual” architect designing your home?
If I do, what business is it of anybody else? If I want to pay a talented handyman neighbor or cousin to install a ceiling fan for me, why is it anybody’s business? Why should he be not allowed to take my money just because he doesn’t have an electrician card from the Bureau of Electrical and Mortuary Science? As TaxGrrrl noted yesterday, occupational licensing is taking over the economy, and that’s not a good thing.
The corporate income tax is inefficient and a not sufficiently stable source of revenue for states. It should be eliminated. The individual income tax is likewise not a particularly stable source of revenue for states, and while counterintuitive, progressive tax systems do not work well at the state-level. Income redistribution, to the extent that it should be a goal at all, should not be undertaken at the state-level. So in a perfect world, yes, the state individual income tax should be eliminated as well.
A Midwestern economist says Iowa policymakers should focus on cutting income taxes rather than property taxes. Ernie Goss, an economist at Creighton University in Omaha, says Iowa’s income tax rates are fifth highest in the country.
“In terms of what Iowa needs to look at, in my judgement, given what’s going on in Kansas, what’s about to go on in Nebraska — Iowa’s neighbors — you need to look at income taxes, in terms of being more competitive,” Goss says.
Iowa property taxes are too high, but income taxes matter more for many taxpayers. While property taxes are a big deal to companies that own real estate, like a manufacturer or a big insurance company, income taxes can mean a lot more to a start-up or a tech company. Fortunately the Tax Update’s Quick and Dirty Iowa Tax Reform Plan is ready to go!
Making a dent in the deficit! A chart shows how much the tax increases on “The Rich” will reduce the $1.2 trillion federal deficit (new taxes in green, deficit in red)
Either the government spends a lot less, or taxes go up a lot for everyone. The rich guy isn’t buying
It’s Monday. Do you know if your payroll taxes have been remitted? Another sad story of a payroll service provider who decided he needed taxes withheld from his clients more than the IRS did. Digtriad.com reports that Arthur Weiss of Winston-Salem, North Carolina is going away for 15 years:
Case documents show Weiss operated professional employer organizations (PEOs), which provided payroll-related services to client companies. For his client companies, Weiss agreed to pay the employees, withhold and remit federal and state taxes, prepare and file the federal and state employment tax returns and provide workers compensation insurance (WCI).
Weiss did pay the employees and withhold the employment taxes, but he failed to remit the employment taxes, keeping them for his personal use.
PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice.
Few thieves report their income honestly. From WHOTV.com:
Disgraced former Peregrine Financial CEO Russell Wasendorf Sr. is in jail awaiting sentencing for embezzling over $200-million in customer funds, fraud, and lying to federal regulators.
Now the state says he may have also cheated on his taxes.
…
Records show the [Iowa Department of Revenue] filed an assessment in November against Russ and Connie seeking $14.1-million in unpaid taxes and penalties to Iowa.
Tax breaks for Hollywood, NASCAR, windmills, algae and multinational corporations ended up in the “fiscal cliff” bill thanks to President Obama, according to Senate Republican sources. But they were spawned by a web of lobbyists, donors and staffers surrounding Democratic Sen. Max Baucus of Montana.
Baucus’ Finance Committee passed a bill in August extending 50 expiring deductions and credits for favored industries. At Obama’s insistence, the Baucus bill was cut and pasted word for word into the cliff legislation.
Spending, by the numbers. Local radio guy Brian Gongol asks, Why do we baffle ourselves with huge numbers instead of talking about budgets in per-person terms? Why, indeed? You could ask 100 people on the street how much money the government spends and how big the deficit is, and you would be lucky to get the size of the budget within a trillion dollars. The numbers are hard to comprehend.
The ability of the politicians to get away with talk about “millionaires and billionaires” proves this — a billion is 1,000 million, and while there are likely people on your street with a net worth of $1 million, you probably haven’t met anybody worth $1 billion. They aren’t remotely the same thing.
In doing year-end tax projections for a client with a once-in-a-lifetime gain from a business sale and a huge resulting tax liability, I wondered how long his enormous (to me) liability would keep the government running. Dividing the 2012 fiscal year spending of $3.796 trillion by the 31,536,000 seconds in a 365-day year, I figure that the federal blob spends $120,370.37 per second. The biggest tax liability I’ve ever seen comes well short of funding 2 minutes of government operations. I probably will never cover a second. Where do you fit?
Fiscal Cliff Webinar! I will be appearing with Roger McEowen on the “Tax Notes From the Fiscal Cliff” webinar at Noon January 14. We will be covering the new legislation and the proposed 3.8% “Net Investment Income Tax” regulations. Register today!
So here’s the big news: the anti-tax side won. Sure, Obama would love to raise taxes even more, especially on people making between $200K and $450K. But now he has almost zero leverage to do that.
I think that’s about right. And now the President has lost his ability to distract attention from the ongoing fiscal calamity with arm-waving about “millionaires and billionaires.”
Reaching an agreement to cut the corporate tax rate should be easy. Major figures from both political parties have expressed interest in reducing the tax from 35%, which is the highest rate among the country’s main trading partners. Corporations would generally benefit from paying less tax and having more cash to reinvest in new projects or pay in dividends to shareholders.
The 35% rate is more of a “sticker price” than a reflection of the average tax burden. Corporations can pay a lower rate by lobbying for special deductions and credits, employing aggressive transfer pricing strategies to shift profits offshore and structuring operations to minimize how much they pay in taxes in the United States.
You can see the same dynamic in Iowa, with its highest-in-the-nation corporation tax rate. That’s just fine for the lucky and the well-lobbied, some of whom actually make money from the Iowa tax law through refundable tax credits, especially the Research Credit. For a little guy without connections or lobbyists, it’s a great reason to set up in South Dakota.
An influential state senator said lawmakers will have to take a harder look at the state’s tax-credit programs this session, including the economic development credits used to entice companies to build in Iowa.
Sen. Joe Bolkcom, D-Iowa City, who was reappointed to chair the Senate Appropriations Committee on Wednesday, held a Statehouse hearing on tax-credit programs Wednesday. He has been a vocal critic of the how the state uses incentive programs to compete against other states for economic development.
That will be a lot easier if it is accompanied by a drastic lowering of rates — or better yet, a repeal of the Iowa corporation income tax. Yet there’s always a voice for breaks for those with connections — in this case Tom Sands (R-Wapello), Chairman of the Iowa House Appropriations Committee. From the story:
Sands said the people in Lee County and Woodbury County — for the most part — aren’t complaining about the incentives offered to the companies and are looking forward to the jobs they’ll bring.
That’s why it’s hard to get rid of these things. Politicians point to the jobs they “create” by bribing companies to do what they would probably do anyway. They don’t have to call press conferences for all of the anonymous businesses that never come to Iowa, or that never get started to begin with, because of Iowa’s expensive and byzantine tax law.
For instance, that extra dividend income could throw some shareholders onto the alternative minimum tax. Some retirees could see more of their Social Security benefits subject to income tax. Some families with children will pay more tax as their child credits phase out.
While some investors would be hurt by the accelerated dividend payouts, many low- and middle-income taxpayers could benefit.
Download and save your electronic pay statement to your computer every payday. Save a copy of the invoice anytime you order online. The same goes for all credit card and bank statements that aren’t paper. Once you have a system started, you can start duplicating the paper documents. A home scanner can be inexpensive and a lifesaver.
Once you’ve created a tax documentation system that works for you, don’t forget to back it up and to safely get rid of the paper documents.
If it’s worth backing up, it’s worth backing up twice.
Russ Fox, Ref Fouls Out. A group of rec-league refs set up an identity theft-based tax fraud scheme. It worked great, until suddenly it didn’t. Russ wisely points out:
All told, the four individuals involved in the scheme must make restitution totaling $200,000. As always, it’s far, far easier to just pay the tax you owe…but that thought rarely occurs to the Bozo mind.
These guys ran their scheme for 12 years before it blew up. The longer you do something like this, the closer your chance of getting caught approaches 100%.
I speak this afternoon at the Iowa Bar Association Bloethe Tax School. I 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.
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.
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.
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.
When your identity is stolen, the IRS will be happy to bounce you around the bureacracy. The Taxpayer Advocate testified yesterday at a House hearing on identity theft. The IRS, which does a bang-up job of rapidly mailing fraudulent refunds, is less streamlined when it comes to helping taxpayers whose identities are stolen:
“Yet today the IRS is moving backward toward a decentralized approach, creating specialized identity theft units within 21 separate functional areas,” Olson told the House Oversight and Government Reform Subcommittee on Government Organization, Efficiency and Financial Management. “If, as seems likely, the IRS reduces the role of the IPSU and directs taxpayers to deal directly with the 21 specialized units, I am deeply concerned that we will revert to back where we were in 2008, with large numbers of taxpayers that have cross-functional issues unable to get their problems resolved without multiple contacts with multiple functions, and that would in my opinion be a disaster for the victims.”
She says that the IRS will have to choose between fast refunds and stopping fraud:
Specifically, we may need to ask all taxpayers to wait longer to receive their tax refunds, or we may need to increase IRS staffing significantly. Under current circumstances, I have come to the conclusion that it is simply not possible for the IRS both to process legitimate returns rapidly and to combat refund fraud effectively at the same time.
So it’s too much to ask for the IRS to make better use of existing resources by not wasting them on the futile and expensive return preparer registration program — a program unwisely supported by the Taxpayer Advocate.
IRS makes doing business in the U.S. even more of a hassle for foreigners. The IRS and Congress are doing their best to make it impossible for Americans to do business abroad with FATCA and the offshore compliance jihad. Now they are doing a bit of the same for foreigners trying to do business here with new rules for International Tax Identifiction Numbers (ITINs).
ITINs are needed when foreigners invest in US real property or other assets where a US tax identification number is needed. U.S. taxpayers just use their Social Security numbers. The process is a hassle, with exacting documentation requirements that often require applicants to send passports to the IRS for extended periods while the IRS processes the paperwork.
While the new rules provide more options for applying for the paperwork, they now make the ITINs expire after five years, requiring taxpayers to repeat the whole process to stay in tax compliance. This hassle isn’t just an issue for offshore taxpayers; it also makes compliance more difficult for U.S. taxpayers with offshore investors. Just another little effort by the IRS does to make staying legal as difficult as possible.
The injunction didn’t go through, so on to the indictment. A few years ago the IRS tried to close down the practice of a St. Louis-area tax preparer after making spectacular allegations of malfeasance. The effort ended in a settlement that looked much like a victory for the preparer. The IRS apparently didn’t take that well. Stltoday.com reports:
Frank L. “Tiger” Zerjav, Jr., 39, of Wildwood, has been indicted for allegedly submitting four years of false tax returns and trying to dodge $182,000 in taxes, the U.S. Attorney’s office said Thursday.
Zerjav was indicted on four charges of federal income tax evasion for the returns covering 2001-2004. He also faces an obstruction of justice charge for allegedly producing altered computerized accounting records after receiving a grand jury subpoena.
They couldn’t put Mr. Zerjav out of business through civil procedures. A tax fraud conviction would do the trick. They’ll need to make a much more convincing showing than they apparently were able to do on the injuction effort. This does remind us that if you get on the bad side of the IRS, your own filings had better be squeaky clean.
Unless something changes, we’re headed toward one of two uncomfortable places. Either we veer over the fiscal cliff and the economy crashes—or we keep going down the road we’ve been taking for more than a decade, delaying hard choices while assuring voters that no really hard choices need to be made. That road probably ends in an even nastier smashup.
I just posted about the fact “that the IRS is getting more out of hand with its ‘due diligence’ requirements for tax preparers who are claiming the Earned Income Tax Credit for clients” here in “WE ARE NOW NOT ONLY TAX PREPARERS, BUT SOCIAL WORKERS AS WELL!”, which was a response to Trish McIntire’s post “EITC Checklist Expanded” at OUR TAXING TIMES.
At the seminar we reviewed in detail the new Part IV “Due Dilligence Requirements” on Pages 3 and 4 of the form. In my opinion the new hoops that we are required to jump through are TOTALLY RIDICULOUS!
Like with the preparer regulations, honest preparers are saddled with rules they don’t need in response to tax cheaters who will ignore the rules anyway.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
Disclaimer
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Howard Gleckman, Let Legal Marijuana Dispensaries Deduct Their Business Expenses. Even when states legalize it, punitive tax rules make it almost impossible to sell legal pot profitably.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
