If you like to ski cross country in Iowa.
Gambling tax maven Russ Fox has important news for the online gamblers:
Casinos in the United States fall under the same currency requirements as banks and other financial institutions. Congress and the IRS recognized that money laundering and other currency shenanigans could occur at a casino. I've always felt that one day the Treasury Department would consider offshore (foreign) online casino to be a foreign financial institution and subject to reporting. Well, that day is here.
Every year I've sent an inquiry to the FBAR group at the Treasury on this subject. This year they responded that these accounts must be reported if the account value requirements were met.
To determine if you need to report your foreign financial accounts (including online casinos), determine the maximum value of each account during 2008. Add up the total. If the sum is $10,000 or more all your accounts must be reported.
Penalties for failing to disclose foreign accounts are the greater of $100,000 or half of the account value. The accounts should be reported by June 30 on Form TD F 90-22.1.
Rod Blagojevich lost a close conviction vote yesterday in the Illinois Senate, being voted out of office by a slim 59-vote margin. The total vote was 0-59. In his defense, that's closer than the current margin in the Minnesota Senate race or the electoral college margin in the recent presidential race.
It also is progress for Mr. Blagojevich, in a way. The last time we covered an Illinois legislative vote in which he was involved, he lost 0-107.
First, he notes:
Alas, you may have missed the most salient point! The average tax rate of 17.17% in 2006, down from 26.38% in 1992.
I pray these people get the tax relief we know they deserve! Lest we return to the turmoil of 1999, when the average tax rate was 22.23%! Heavens, no!
He then helpfully adds:
My apologies. Obviously, the 1.77% stat you cited appears next to the fact that this represents 17.17% of AGI, so you did not miss it, you ignored it.
Carry on, top 400 taxpayer advocate!
Can't slip one by old Erich! The low effective rate, of course, is explainable by simple arithmetic. As we noted, the biggest single income component in the top 400 returns is capital gains. As they are taxed at a top rate of 15%, that dramatically brings down the top rate.
This reduction in the effective rate for the very highest-income taxpayers has been noted before, most famously by David Cay Johnston. It begs the question: is this a problem?
There seems to be a widespread belief that low capital gain rates are a good thing. The top capital gain rate was lowered to 20% (from 28%) during the Clinton administration, which also increased the rate on ordinary income to 39.5%. The Bush administration lowered them further, to 15%.
It's to be expected that the biggest capital gains, the ones that push you into the top 400 returns, only happen once in a lifetime - say, when you sell your business or take it public. As the Tax Policy Blog notes, 73% of the returns in the top 400 are only there once in the 15-year period measured. As long as you have favorable capital gain rates, the very top income returns will normally have a lower effective rate than the merely wealthy.
The highest effective tax rate is for the top 1% of returns below the top 400 or so filings. Their average tax rate is around 22.79%. Erich is clearly moved by this injustice to the top 1% of taxpayers, whose AGI starts at $388,806 in 2006. The top rate goes down from there, with an average rate of 17.48% for the top 2-5% of filers, and a 12.6% rate for the top 6-10% of filers. You can see the details here.
To raise the effective rate of the top 400, you would have to make a major tax policy change in the taxation of capital gains. In effect, you would say capital gains should be taxed at a lower rate, except when they really matter, unless you oppose a capital gain break for everyone.
I don't know what Erich considers as the ideal top rate, though I suspect he might begin to be satisfied with 55% marginal rates, like Linda Beale.
I'd prefer to broaden the base and lower the rate for all income. Lower rates lower the stakes for loopholes and enable taxpayers to make decisions for business reasons, rather than tax reasons. It takes the government out of the decision loop - which politicians don't like, as it weakens their power and their ability to raise funds to carve loopholes. I like the Tax Foundation's idea of a broad based system with a 9% rate on all income that would raise as much revenue as the current system. But if we must be progressive, this broad system could stand 5% and 15% brackets. And no capital gain preference.
Two of our most powerful taxpayers tell share their secrets at Iowahawk. They have some advice for "Chris in New Haven," who pours out his woes:
The trouble is when I woke up, there was $200 billion in taxpayer money missing from the nightstand and Angelo was gone. I feel like I should really report it to the police but I don't want Angelo to get in trouble. I'm also worried that they might start asking embarrassing questions, and I might end up having to pay taxes on Angelo's gifts. I feel like I'm being taken advantage of twice! Do you have any advice?
The answer will warm your heart.
The IRS released a batch of statistics on the 400 1040s with the highest adjusted gross income (AGI) in 2006.
It's an exclusive club. In 2006 the bouncer kept out anyone with AGI under $110,602,000. These 400 taxpayers had 1.31% of the AGI reported on the 138.4 million 1040s filed. They also paid 1.77% of the taxes.
These average 2006 AGI for the flush 400 is $263.3 million. The biggest chuck of the average AGI is net capital gain averaging $165.2 million. This implies that many of these folks only get there once, when they sell their businesses, though some happy hedge fund managers surely made the cut, too.
The next largest component is average partnership and S corporation income of $66.3 million; these 400 returns had 2.87% of all K-1 income in 2006. These are taxpayers who are personally paying the taxes on their business operations; an increase in the top individual rate would be a direct increase on the business tax rate, affecting a significant chunk of the productive economy.
They also averaged $24.6 million in charitable contributions, or 9.3% of their AGI. For reference, President Obama gave 6.1% to charity of his $983,826 2006 AGI, while Vice-President Biden donated 0.15% of his AGI - $380 out of $248,459.
Update: We address Erich's concerns here.
Governor Culver came out with his "austerity" budget yesterday. In these tough economic times, he surely decided that education and health is more important than pork and corporate welfare?
Well, not exactly. The Grow Iowa Values Fund, which finances corporate welfare and white elephants statewide, would spend $50 million in 2009 and $47.5 million in 2010. He would eliminate corporate welfare tax credits - well, $15 million out of $215 million, anyway.
It would be nice if state leadership took advantage of tough times to do some real reform - eliminating the corporate income tax and the dozens of corporate welfare subsidies (especially the insane film subsidy), while reducing the individual income tax rate and broadening the base. Neither party seems to have any intentions along these lines.
The new era of bipartisanship got underway yesterday as 11 Democrats joined every House Republican in getting rolled by the rest of the Democrats; the House approved its version of the $3 gazillion stimulus plan, 244-188.
The battle now moves to the Senate, where one or two squish Republicans will be bought off with some bogus tax break to reach the 60-vote threshold that will enable us to "stimulate" the economy with our own money through the next decade.
"Girls Gone Wild" impresario Joe Francis has fired the lawyer who got Wesley Snipes convicted only of failure to file, rather than his more serious tax evasion charges. It seems that Mr. Bernhoft, who got his start working with tax protesters before the Snipes trial made him a minor celebrity in the tax defense world, left on rather bitter terms.
TaxGrrrl says that Mr. Bernhoft should have seen the signs:
But Bernhoft had to see this coming. After all of the other law firms, the signs had to be there: the late nights, the roving eyes, the saying he’d call when he didn’t. He wasn’t ever going to commit to just one law firm. He’s not that kind of guy.
Come on. Could this man be unfaithful?
A Texas Congresscritter makes a point for tax fairness:
All U.S. taxpayers would enjoy the same immunity from IRS penalties and interest as House Ways and Means Chairman Charles Rangel (D-NY) and Obama Administration Treasury Secretary Timothy Geithner, if a bill introduced today by Congressman John Carter (R-TX) becomes law.
Carter, a former longtime Texas judge, today introduced the Rangel Rule Act of 2009, HR 735, which would prohibit the Internal Revenue Service from charging penalties and interest on back taxes against U.S. citizens. Under the proposed law, any taxpayer who wrote “Rangel Rule” on their return when paying back taxes would be immune from penalties and interest.
Of course, that violates the principle that some animals are more equal than others.
The new Cavalcade of Risk is up at Health Business Blog. Among the valuable insurance and risk-management nuggets this time is an important Insureblog post on the life-giving, Anti-Alzheimer's benefits of coffee.
The Roth & Company anti-aging elixir machine. Because we're just that nice.
Considering the amount of search engine traffic we get at our old posts on S corporation health insurance, the issue must be perplexing to business owners. The old posts still get questions. We tackled one yesterday. Today we do three:
I'd also like to know how it should be disclosed on the financial statements because of the difference in gross wages shown on the financials vs. the higher gross wages per payroll tax reports and W-2s.
Normally fringe benefits, including shareholder health insurance, will be under the "employee health insurance" line on internal financial statements, unless you have a separate line for shareholder health insurance.
If I add this amount to the taxable fed and state on the W-2, do I also have to account for this on the 941?
Form 941, the Employer's Quarterly Federal Tax Return, has a line for "Wages, tips, and other compensation." The total of Box 1 on your employee W-2s should tie to the total of this line on your four 2008 Forms 941 -- so yes, it should be reflected on the 941.
When adding my health premiums to my W-2 form on line 1 and 14 do i also have to increase the amount for state income on line 16? I live in Michigan if that matters.
I am not aware of any state that taxes S corporation health insurance differently than the federal government (Update: I am now - Pennsylvania). It appears that Michigan makes no such modification to federal W-2 income, so the federal and Michigan treatment would be the same.
The Senate Finance Committee version of the stimulus tax bill includes a "patch" to protect millions of taxpayers from the alternative minimum tax through 2009. The bill increases the AMT exemption "temporarily" (to $70,950 for joint filers and $46,200 for individuals), enabling Congress to pretend their fiscal situation is slightly less dire than it really is.
The Senate bill also has some other new provisions:
- It matches the House bill's conversion of the spiff for first-time homebuyers to an actual credit, rather than an interest-free 15-year loan.
- It lets businesses stretch the payment of tax on debt forgiveness income over 10 years.
- It reduces the 10-year built-in gain period for
new S corporation elections built-in gains recognized* in 2009 or 2010 to 7 years for S elections taking effect in 2009 or 2010.
Because we all know that it's the built-in gain tax that's holding back the economy, after all.
*A reader pointed out that the S corporation Association website said that it applied to built-in gains recognized in 2009 and 2010, not elections made in those years. A reading of the legislation itself, which is now available online, confirms that. Advance to page 60 of the legislative text for the provision.
The Congressional Budget office reports that the pending "stimulus" package would only spend 9% of its $356 billion in government purchases in 2009, and only 41% of it by the end of 2010. In fact, "stimulus" spending would continue through 2019 (and interest payments on the borrowed money far beyond that).
If the economy is still needing stimulus after 2010, it would seem that "stimulus" doesn't work very well. In fact, evidence that it works at all is surprisingly thin, considering how frantic the politicians are to go through with it. It's almost as if they are using stimulus as an excuse for something else.
If you must have stimulus, you could get it all done in two years - or even one - with tax cuts. It seems wise to get your stimulus in before the recession ends. But how many CIETC Tom Harkin Learning Centers, Robert C. Byrd Expressways, or Charles Rangel Centers for Public Service get built by a tax cut?
Peter Pappas has put up a handy chart summarizing the ways a taxpayer can get help when battling a tax bill.
Thanks to Google we get a lot of visitors here trying to unravel the mysteries of reporting S corporation fringe benefits, especially health insurance. That has triggered some good questions, which we'll try to wrap up this week. First up, a bunch of questions rolled into one:
Regarding health insurance and W-2 reporting for an S-Corp here is the fact pattern: -The S-Corp is owned 100% by the 75 year old father who is still active in the business and receives a W-2
-The S-Corp has 4 employees who are his children - all active doing real work - W-2's from $40,000 to $150,000
-The S-Corp pays the health insurance for all the children
-The father reimburses himself for his Medicare premiums and his personal Medicare supplement
Here are my questions:
1) Can the father claim the Medicare premiums as health insurance benefits - include on his W-2 - deduct as wages on the corp and deduct on his 1040 line 29 as self employed health insurance?
2) Can the father claim the Medicare supplement as health insurance benefits - include on his W-2 - deduct as wages on the corp and deduct on his 1040 line 29 as self employed health insurance?
3) Since a more than 2% shareholder of an S-Corporation also includes the shareholder's children, do the premiums paid for the children go on their W-2's, get deducted as wages on the corp and then get deducted on the children's returns as self-employed health insurance line 29?
The answer to 1 and 2: Voluntary payments for Medicare premiums, including supplemental coverage, are treated as health insurance under the tax law. If they are reimbursed by the employer- S corporation and included on the employee's W-2, they should be deductible to the shareholder on Form 1040, Line 29. See Rev. Rul. 79-175.
Question 3: Children of S corporation shareholders are considered to be 2% shareholders themselves (Rev. Rul. 91-26; see situation 2), and all of the Notice 2008-1 rules on health insurance apply the same way they would to the actual stockholder.
The Tax Policy Center has issued grades on the stimulus package tax proposals. The center-left think tank gives highest marks to tax credits for low-income families (discussed here) and five-year NOL carrybacks.
I think the grades are quite generous, but if they're grading on a curve of the last 20 years of crummy tax legislation, they're not far off.
News item #1: Stanford Law Grad Christina Warthen will pay $313,000 to the government as part of a plea bargain over charges she evaded federal income taxes on income from running a call-girl ring.
News item #2. Timothy Geithner was confirmed as Treasury Secretary despite inexplicably boggling several years of tax returns.
The Moral? Use Turbotax, apparently.
Paying professional services invoices promptly is only one part of it (but certainly an important part!). Kay Bell has rounded up commentary from tax pros on other aspects of being a good tax client. For example:
Neither are tax pros magicians. They can't just conjure up your tax data. You have to get it to them, ideally in an as complete and organized manner as possible.
Flach again: "I wish clients would provide me with specific numbers for deductions they are claiming instead of telling me 'claim the maximum' or 'whatever I am allowed' or 'same as last year.' It is very rare that an expense or number of miles driven for an activity is exactly the same as it was the previous year. I need clients to tell me '$1,023.50' or '$20 per week for 50 weeks' or '4,638 miles.'"
The whole post is worth reading. Being a good client helps the preparer, but it helps you more by keeping your costs down and avoiding mistakes.
I knew that Florida real estate wasn't doing well, but this is ridiculous:
Though there are indications that the price may not be entirely related to market conditions.
There is a lot of talk about all of the "shovel-ready" projects that will be funded by the stimulus package. No doubt that is correct. It's just that, to some of us, "shovel-ready" doesn't mean what the politicians think it means.
From the Quad City Times:
A proposed local income tax has little support among local civic officials or state legislators from the Iowa Quad-City area.
Why might someone next to the state of Illinois oppose higher income taxes in Iowa? Maybe it's Iowa's 8.98% top rate, compared to Illinois' top rate of 3%. But it's just a theory.
Illinois Governor-for-now Rod Blagojevich says he's the last thing standing between Illinois and a big honking tax increase:
"They want to get me out fast so they could put a huge income-tax increase on the people of Illinois," the governor said on WLS-AM 890's "Don Wade & Roma" show. "It's either going be a 66 percent income-tax increase or a 33 percent income-tax increase. And they want to raise the sales tax on gas. . . . If I'm out of the way, they can quietly push this through."
That's our Rod, a tireless opponent of tax increases.
See you there!
With $40 million of tax benefits ready to go, Microsoft has delayed the construction of its
shipping container server farm in West Des Moines.
It must have pained somebody at the Des Moines Register to write this:
Microsoft is delaying its $550 million data center in West Des Moines, the company confirmed on a blog Friday.
This blog, I think. But everyone knows blogs don't do real reporting!
The House Ways and Means Committee passed the tax portion of the latest stimulus bill, but with a weird change. The new version says that taxpayers who elect a five-year carryback for their 2008 and 2009 net operating loss have to reduce the NOL by 10%.
It's hard to see where there is any policy wisdom in this change. The whole purpose of the NOL carryback and carryforward provisions is to mitigate the possiblity of businesses being taxed on more than 100% of their taxable income. If there were no carryover provisions, a business could lose a million dollars in year 1, make a million in year two, and pay tax on a million dollars of income when there was no net income over the two year period.
If this provision remains, businesses will have to make a complex bet on whether it's worth more to carry back a loss 3-5 years with a 10% haircut than to carry it back only two years or forward to offset future income. Whatever the era of hope and change will be, it doesn't look like simplicity will be part of it.
The TaxProf has a roundup.
A prominent developer from Wood River pleaded guilty Thursday to a federal tax evasion charge.
Ricki Lee "Rick" Jones, 55, entered his guilty plea in U.S. District Court in Benton (IL) to a one-count information charging him with tax evasion. The violation took place regarding tax year 2003.
So Rickie Lee Jones fans can breathe easy. Cue the music:
This doesn't exactly inspire confidence in our tax system.
An Alabama outfit that does volunteer tax preparation using college students sent some students undercover to commercial return prep services. Hilarity ensues:
In each scenario, Impact Alabama staff members used their W-2 tax forms and described themselves as parents with one or two children who lived with them less than six months of the year. For parents to claim the Earned Income Tax Credit, they must have a child more than half the year.
Eleven of the 13 tax preparers claimed the credit on the tax returns.
OK, so it's not really funny. What it does illustrate is how absurd it is to have a tax law full of finely-tuned credits and tax incentives. If even people who do taxes for a living can routinely screw up a relatively simple tax break, why would anybody think that detailed, finely tuned tax breaks -- like the Section 199 deduction, education breaks, etc. -- can ever work as intended?
News item 1: Antoine Haber fails to report all of his taxable income from his cabinetmaking business and beauty shop. Evidence in his Tax Court trial showed the taxpayer failed to keep adequate books and records to support his tax return, and he was assessed a 20% "accuracy related penalty."
News item 2: Timothy Geithner, who failed to properly pay self-employment tax on income shown on his W-2, in spite of signing a document acknowledging that he had to pay the tax, not only was not assessed penalties for his failure to pay the taxes, but was approved as the next Treasury Secretary by the House Ways and Means Committee yesterday. He will oversee the IRS in his new job.
The TaxProf reports that TurboTax may have had a role in the Treasury Secretary-designate's tax troubles. Jim Lindgren shows that TurboTax wouldn't have flagged his big errors. Still, Prof. Caron notes correctly:
Of course, as any tax professional know, TurboTax (and any of the other leading software programs) easily calculate self-employment tax (as well as the disallowance of a dependent care deduction for the cost of your kids' overnight camps). The errors here were entirely Geithner's, not TurboTax's.
Garbage in, garbage out.
But if you want to save taxes like Tim Geithner, Kay Bell is giving away a copy of TurboTax!
More on the TurboTax defense here.
When you get into a discussion with tax protest folks, you often end up with mutual incomprehension. A former commenter here continues the tradition. He says it's a contradiction that I think that taxes can be legitimate, but I oppose nationalization of 401(k) plans.
The contradiction is that while both boil down to human beings using governments to take property by force and without voluntary consent from other human beings, Mr Kristan applauds one and pans the other.
It's sort of like saying you can't support a glass of wine with dinner while opposing drinking a fifth of whisky. It's a contradiction!
Sanity strikes Ohio ($link):
As reported in State Tax Notes, Ohio Gov. Ted Strickland (D) vetoed a measure providing tax credits to filmmakers. Ohioans should be proud that their governor didn't succumb to the glamour of Hollywood and agree to that gimmick. You see, the Ohio Department of Revenue did its homework and found that for every dollar in credits, the state would get back 18 cents.
Of course, Iowa has one of the most generous film credit programs, offering up to 50% financing of film projects. It fits in with our Younkers sale approach to public finance: the more you spend, the more you save!
From the inaugural speech:
We will harness the sun and the winds and the soil to fuel our cars and run our factories.
It reminds me of this from John Scalzi's "Old Man's War":
Striking first against Consu was not an option. Their entire inner home system was shielded. The energy to generate the shield came from the white dwarf companion of the Consu sun. It had been completely encased with some sort of harvesting mechanism, so that all the energy coming off it would fuel the shield. Realistically speaking, you just don't **** with people who can do that.
If he pulls that off, it will make Republicans think twice before tangling with him.
The IRS has issued an example of how to compute K-1 percentages for profit, loss and capital. Some interesting things that come out of it:
-Only items that affect partner capital accounts should affect partner profit and loss percentages.
-Sec. 704(c) built-in gain and loss allocations should not affect profit and loss percentages reported on the K-1, as they should already be reflected in capital accounts.
-If there are no losses affecting capital accounts to report for the year, loss ratios should be reported as zero. Presumably if there were no income items for the year affecting capital accounts, profits would likewise be allocated at zero percent for everyone.
If half of K-1s get reported correctly, it would be a miracle.
The Obama era has begun. The TaxProf has collected some academic tax policy advice. I like this best:
Joseph Dodge (Florida State): Do not do any more damage to the Code.
If you believe in limited government, in our federal system, in economic efficiency, in doing things that work regardless of ideology, President Obama, then please take inspiration from the 1986 Tax Reform Act and help to return to a broader tax base with lower rates.
Limited government should reject a tax system full of special tax favors and tax detriments that in effect say, "Do it my way or pay up to 35% (more in some cases)."
On a more down-to-earth level, a reader asks TaxGrrrl: Should I Wait on Obama to File My Taxes? Short answer: no.
The era of hope and change looks surprisingly like 2002. The text of the House Ways and Means tax bill is now available (hat tip: Benefitsblog), and its business proposals take us to the future by going back seven years:
- a five-year carryback for NOLs incurred in 2008 or 2009;
- 50% bonus depreciation for property placed in service in 2009.
- Extension of $250,000 bonus depreciation through 2009.
The bonus depreciation and Sec. 179 provisions extend current law one extra year.
The NOL provisions allow 100% offset of alternative minimum taxable income for the carrybacks. They also allow taxpayers to carryback only two years, rather than five. TARP recipients are shut out of the five-year carrybacks.
There are a few provisions that aren't reruns of Bush stimuli. Taxpayers with income up to $75,000 of AGI ($150,000 for joint filers) get a "Making Work Pay" credit of up to $500, or $1,000 on joint returns. So your $75,000 job doesn't pay now, but an extra $500 will make all the difference, apparently.
The bill also repeals the requirement that taxpayers receiving the first time homebuyer "credit" repay the amounts. Now the IRS goes from being the lender of first resort straight into the down-payment assistance business.
The bill also includes some other miscellaneous credits, including a temporary increase in the earned income credit and some new education credit provisions.
Dr. Maule correctly notes: "Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time."
Hope and Change, indeed.
The people have spoken. Execrable Section 409A is the worst single tax provision of the Bush 43 era:
The write-in vote was for bonus depreciation.
Today starts a whole new era of bad tax policy!
Out in the cold without tickets to the inaugural? Everyone is invited to the Cavalcade of Risk and the Carnival of Taxes!
The first 2008 Cavalcade of Risk, a roundup of insurance and risk-management items, is at Consumer News. Kay Bell's Carnival of Taxes has posts on choosing a tax pro, choosing tax software, and lots of other good stuff.
Everybody knows that you can't depreciate land. You can depreciate a term interest in land, though, under the right circumstances. Roger McEowen discusses a recent IRS private ruling that explains how it works.
Roni Deutch has some sound tax advice for the over-the-road set. I liked this:
Keep Immaculate Records
With the tax-filing complications of the trucking industry, dozens of truckers get audits in the mail every year. While an audit is never a "good" thing, as long as you have your financial information organized then you should not have anything to worry about. Throughout the year, keep your receipts and financial records together and safe in a box. When its time to get your taxes done, take the whole box in so that you have all the info you need.
The Martin Luther King Jr. holiday is a good time to recall a Des Moines incident that foreshadowed civil rights events starting a decade later:
In July 1948, Griffin, her baby daughter Phyllis and two other African Americans ordered ice cream cones at the Katz Drug Store in Des Moines but were refused service because they were black. It was the first time that Griffin had experienced such discrimination directly.
She successfully sued, customers boycotted Katz, and the store eventually abandoned its discrimanatory policy.
The Katz space is now occupied by a Quiznos:
As for why the Wienermobile is there this morning, I have no idea.
Celebrities will be probed by a new force set up to combat tax evasion among the rich.
Pop stars, actors and footballers are among those the High Net Worth Unit are expected to target.
Those found avoiding tax could face prosecution and will have to cough up for any unpaid revenue. Sir Paul McCartney, Sting and Lord Andrew Lloyd-Webber could be among those whose affairs are examined by the body, called the VIP Unit.
Come on, you famous Brits. Iowa beckons!
Today is the final full day of the Bush presidency. It wasn't exactly a golden age of tax policy. Today is the final day for our poll on the very worst tax enactment of the Bush administration. The execrable Section 409A deferred comp rules lead the pack so far.
We'll announce the results tomorrow.
Maybe they could work out land sales. If they could sell just a bit of San Diego to Iowa - maybe the zoo - it would do wonders for our tourism industry.
Can you identify this frozen outpost of higher education that the Tax Update is visiting this week?
Update: This is the Musical Arts Center at the University of Indiana, Bloomington.
The IRS has issued (Rev. Rul. 2009-05 the minimum required interest rates for loans made in February 2009:
-Short Term (demand loans and loans with terms of up to 3 years): 0.6%
-Mid-Term (loans from 3-9 years): 1.65%
-Long-Term (over 9 years): 2.96%
The Tax Court upheld the IRS position that S corporation "Q-Sub" banks are not excused from the 20% "TEFRA" disallowance of interest expense attributed to holdings of municipal bonds. Section 291, the provision that causes disallowance of the interest, on its face excuses S corproations from the provision after their third year following an S corporation election. The court held that Q-sub banks - banks owned by a holding company - are banks first, S corporations second, and ruled that the deduction is disallowed.
The Tax Court didn't address the relatively rare case of banks without holding companies. It is still possible that such banks would be excused from the TEFRA disallowance,
So much for my prognostication skills. While the taxpayer could still appeal, it looks like this will be a losing battle for S corporation banks.
UPDATE, 3/18/2010 Wrong again! Or, I was right the first time. The Seventh Circuit has overturned this Tax Court decision.
Cite: Vainisi, 132 T.C. No. 1.
Prior Tax Update Coverage:
As if Iowa's state finances weren't bad enough. From the Des Moines Register:
A backlog of Iowans' income tax checks wasn't deposited in December - making the state's revenue picture seem even bleaker.
A computer system upgrade at the Iowa Department of Revenue prevented processing personal income tax "estimate" payments between Dec. 15 and Jan. 2.
That made it appear that receipts for that period were an alarmingly flat line, hovering just above zero.
All $20 million in checks are now deposited.
Great idea - shut down estimated tax processing at the second-busiest time of the year, behind only the April crush. Maybe it was a secret "stimulus" plan to keep funds in the private sector a little longer.
This might cause trouble in future IRS exams for taxpayers who made a big year-end estimated payment to get the deduction in 2008, but whose checks didn't get cashed until 2009. It just goes to show that it's a good idea to use certified mail, or Iowa's electronic estimated tax payment system, when you are making a big estimated tax payments.
The House Ways and Means Committee has released a sketchy outline of the tax provisions for the proposed economic stimulus package. Business provisions include:
· Extended Bonus depreciation
· 5-year carryback of net operating losses (excluding companies receiving TARP benefits, Fannie Mae, Freddie Mac)
· Extension of increased small business expensing
· Expand work opportunity tax credit for disconnected youth and unemployed, recently-discharged veterans
The bill also repeals prospectively the controversial Sec. 382 built-in loss ruling that helped sweeten the Wells Fargo acquisition of Wachovia.
Other provisions include $500 - $1,000 tax credit for everybody (probably excluding high income taxpayers), in place of a rebate program, as well as a hodgepodge of energy tax credits.
Some not-so-good ideas: I know we are all green these days, but I’ve got my doubts about $32 billion in energy subsidies. Thirty years ago, the Carter Administration created the Synfuels Corporation that was supposed to wean us off of foreign energy. That didn’t work out so well, and there are troubling echoes of that failed industrial policy in this plan.
Some dogs: Bonus depreciation. We keep trying this, and there is little evidence that it encourages new investment. Tax-exempt bonds for economic development in low-income “recovery zones.” This will move some jobs around, but it is not likely to create many new ones.
Whatever comes out of this, it's sure not going to simplify anything.
A shocking report by the Treasury Inspector General for Tax Administration says that the IRS e-file system has security vulnerabilities that put taxpayer information at risk:
Security weaknesses in the controls over system access, monitoring of system access, and disaster recovery have continued to exist even though key phases of the MeF system and the M-TRDB have been deployed. As a result, the IRS is jeopardizing the confidentiality, integrity, and availability of an increasing volume of tax information for millions of taxpayers as application phases are put into operation.
So the IRS is leaping into action to fix this?
Although the IRS agreed with all of our recommendations, its related corrective actions are focused on continuing to follow existing processes or strengthening current processes. As stated in the report, we believe that the existing security vulnerabilities were not caused by process deficiencies. Instead, IRS offices did not carry out their responsibilities for ensuring that security weaknesses were corrected before deployment.
In other words, IRS will continue to follow procedures that didn't work. This sort of thing isn't going to help convince anyone to e-file.
Leona Helmsley and Al Capone tied in the Peter Pappas poll for "worst tax cheat." It's a shame they had to wait until the afterlife to get together like that.
The Tax Update is on the road accomanying the high schooler on a college visit. We hope you are coping better with the cold than this driver who came to an abrupt stop westbound on I-80 in eastern Iowa.
The Treasury has issued the term sheet for S corporation banks to participate in the TARP scheme. S corporations were shut out from prior TARP rounds because they are not permitted to issue preferred stock.
To get around this problem, TARP funding for S corporations will be in the form of subordinated debt. The debt will bear a 7.7% interest rate for the first five years, and a 13.8% rate thereafter. That compares to the 5% and 19 rate for TARP preferred stock. The S corporation rate is higher because interest on TARP senior preferred is deductible, while dividends are not.
The rules prohibit dividends for any periods when the quarterly interest payments are in arrears, and they restrict dividend increases while the debt is outstanding. This could make S corporation bank shareholders nervous, as they rely on bank distributions to enable the to pay tax on the S corporation income they must report on their 1040s. It could also be a problem when individual tax rates go up as scheduled in 2011, as Treasury approval is required for dividend increases over 3%.
That would seem like a problem for S corporations, as they often calibrate their dividends to taxable income to cover their shareholders tax payment needs. The Treasury term sheet addresses this:
Notwithstanding the foregoing, UST consent shall not be required for any increase in dividends where such increase is solely proportionate to the increase in taxable income of the QFI and such increased dividends are distributed to shareholders in order to fund their individual tax payments on such allocable taxable income (“Tax Distribution”). UST (and subsequent investors who purchase the Senior Securities) shall have the right to challenge the amount of the proposed Tax Distributions to the extent it believes they exceed the amount necessary for the QFI shareholders to pay their allocable share of income taxes.
It will be interesting to see whether this will be interpreted as blanket authority to increase dividends to cope with increases in federal or state tax rates.
The regular TARP program also gives the Treasury stock options in TARP financial institutions. S corporation stock options can present tricky problems. The S corporation TARP terms bypass these issues by providing warrants to force S corporation banks to issue additional debt to the Treasury.
The S corporation TARP debt will not be callable for three years unless the bank has obtained new equity. TARP executive comp restrictions will also apply.
I doubt many S corporation banks would issue debt to anyone else on these terms. Some community banks have participated in TARP because they say it makes them look stronger to potential customers. Others have decided it is too costly, and not worth the hassles and restrictions. It will be interesting to see how many S corportion banks participate. They have 30 days to decide.
I received this email from a reporter asking about Treasury Secretary-designate Tim Geithner's tax problems:
It's complicated working for an international institution that doesn't pay social security taxes. But 1) the IMF makes it pretty clear to its US employees that they owe the tax 2) the IRS audited his 2003 and 2004 returns in 2006, detected the oversight, and charged him nearly $15,000 plus interest, which he paid and so 3) it's hard to believe he didn't know in 2006 that he'd made the same mistake in his 2001 and 2002 returns (when he owed $29,500) but he chose not to pay that until November 2008 after Obama expressed an interest in tapping him for the cabinet. There have been other tax lapses but nothing so serious or costly. So are these honest mistakes or a lapse in principled behavior?
The long question provides a nice roundup of the situation. I don't know if I responded in time to meet the reporter's deadline, but here's how I answered:
I think it's as likely an indication of foolish carelessness than unprincipled behavior. When you are happy with your tax results, the natural inclination is to not double-check your work. I'd have to know Mr. Geithner better before I assumed the worst. Still, considering his tax history, It doesn't reflect very well on his judgment.
As far as not paying the 2001 and 2002 taxes, he did what any normal taxpayer would have done. If a statute of limitations has run, the normal and healthy reaction is to keep your money, because at that point you don't owe it anymore. Now that he's been nominated as Treasury secretary, Mr. Geithner is no longer a normal taxpayer.
Considering the scary financial situation the country faces, the new President should probably be allowed to staff his team with whoever will be most effective, even if he has been caught in bed with a live boy and a dead girl. Still, this tax problem has to make you question Mr. Geithner's judgment.
Think about it:
- He'd already had trouble with social security taxes for household employees. You'd think that would make him extra sensitive to that sort of thing.
- He completed and signed a worksheet that he submitted to the IMF saying "I wish to apply for tax allowance of U.S. Federal and State income taxes and the difference between the 'self-employed' and 'employed' obligation of the U.S. Social Security tax which I will pay on my Fund income."
- He knew enough about self-employment taxes to pay them on Schedule C income earned by him and by his wife.
- He had a complicated return, but he didn't get professional help until 2003.
- In his last job, he was the head regulator for Citicorp as it was digging its grave.
In his defense, he did have the good sense to not pay back taxes for years barred by the statute of limitations after he was examined. Until he did.
He was a busy man, and it's certainly easy to screw up a tax return. You just have to hope that these aren't the most representative pieces of data for his judgment. It would be appalling if he were really the President-elect's second choice, but the first choice was disqualified for saying boys might be different from girls.
Governor Culver proposes to spend $700 million we don't have to pave the prairies with new bicycle trails, airstrips and roads to nowhere. This pretty much is the discredited approach of Japan's "lost decade" of the 1990s.
So Republicans take up arms to stop this feckless nonsense, right? Not exactly:
"I was actually, on a personal level, hoping that the number might be a little bit higher," said House Minority Leader Kraig Paulsen, a Hiawatha Republican. Republican legislators will discuss whether to push to use more money from the rainy-day fund, he said.
With leadership like this, maybe it's time for another infrastructure project:
The Tax Foundation has put all of the state corporate tax rates for 2009 in one handy place. Iowa's 12% top stated rate is still the highest out of 50 states.
Kay Bell has a nice roundup of the mish-mash of federal higher education tax benefits. While they may be unwise as a matter of policy - I think that tuition goes up by about the value of every new tax benefit - you should use them if you can.
UPDATE: In the comments, Amanda makes the excellent point that double Hope and Lifetime Learning credits are available for taxpayers attending college in the Iowa disaster area and other midwest storm diaster counties.
As we get ready to inaugurate another President to lead our tax policy process, it's worth looking back at the last eight years of tax policy. I count at least 21 pieces of tax legislation that merited their own special guide from RIA, the legal publisher, during the Bush administration.
Of course the biggest bill was the 2001 Economic Growth and Tax Relief Reconciliation Act. It's biggest impact was the reduction of the individual regular tax rates, with the top rate falling from 39.6% It also repealed the estate tax and increased the AMT exemption. But it all had a catch: it all expired. The AMT exemption expired first, in 2004, and the entire thing goes away in 2011 as if it were never enacted.
The expirations were a ploy to enable the "cost" of the legislation to fall within an acceptable range for Congressional budgeteering purposes. The drafters assumed that the political winds were blowing in a Republican direction, and that they had plenty of time to make the cuts permanent.
Of course, things didn't work out that way. When the temporary AMT provisions expired in 2004, millions of taxpayers were threatened with AMT because of the reduction in their regular taxes. Congress boldly responded by enacting the first in a series of temporary "patches" that increased the AMT exemption for a year at a time.
The legislation came thick and fast as the years went by, including some truly awful provisions. I think the execrable Section 409A deferred compensation rules were the worst, followed by the Section 199 production deduction. Tastes differ, though, so we will once again take a vote. Polls close January 20!
See you at the polling place!
One of the joys of tax work in recent years is the continuing compression of the filing season. It started in 1986 when Senator Mitchell spitefully forced partnerships and S corporations into calendar years because the accounting industry didn't support one of his proposals. Combined with the proliferation of pass-throughs, this means needed K-1s are usually not ready until at least March.
More recently, the 15% rate for "qualified" dividends made it much more difficult for corporations to do their 1099s. Last fall Congress "solved" this problem by ratifying the reduction of the tax season to 8 weeks -- they rolled back the 1099 deadline to February 15. The IRS has released new guidance on the rollback here.
The tax evasion trial of a St. Louis auto dealer began yesterday in St. Croix, U.S.V.I. James Auffenberger is accused of illegally shifting U.S. income to the Virgin Islands through phony management fees to enable him to take advantage of a heavily-marketed 90% U.S.V.I. tax credit.
The trial has implications for many high-income taxpayers who attempted to use the Virgin Islands economic development break.
Links to Prior Auffenberg Tax Update Posts:
Polls are still open at Peter Pappas' place. My vote is for Capone, of the ones listed. Leona Helmsley was a piker!
The Des Moines Register says that the legislature may take a long-overdue look at Iowa's corporate-welfare-via-the-tax-law system in the session that starts today. They also printed two opinion pieces that inadvertently show how we arrived at our current mess.
The Register tees it up:
Up for grabs are more than 200 sales, income or property tax exemptions as well as dozens of tax credit programs that range from tax breaks for the purchase of argon gas to programs that refund millions of dollars every year to companies doing research in Iowa.
The exemptions - many decades old - were put into place for Iowa to remain or become competitive for high-paying jobs and skilled workers.
But many of the incentives have been on autopilot, dragging on for years without an examination of what benefits they provide to Iowan
Whenever the state passes out subsidies, you can count on the subsidized to defend them:
"How does the state expect to be competitive in attracting business without those kinds of programs?" asked Dean Jacobson, who in 2000 started BoDeans Baking Co. in Le Mars with his wife, Bo.
With the help of $250,000 in grants and loans from the state during the past five years, BoDeans has grown from 23 to 150 employees. The sugar cone manufacturing company now has a payroll of roughly $3 million and is considering a $6 million expansion.
The company would have located in Chicago if state incentives hadn't been available, Jacobson said.
Millions of dollars in local and state tax revenue that every year exceeds the state's initial investments in property taxes alone would have been lost.
That's one of the problems with corporate welfare: the reporters can find the recipients, because the Department of Economic Development likes to take credit for the "jobs" created. But that money doesn't just come from thin air - it comes from the rest of us, leaving everybody else with a little less to spend, and in aggregate costing at least as many jobs, at least as much growth. Unfortunately, nobody calls a press conference when a business closes, leaves or doesn't locate here in the first place because of our high individual tax rates, our highest-in-the-nation corporate tax rate, and the byzantine complexity created by 200+ special breaks.
If this stuff really worked to improve Iowa's economy, you'd expect it to show up in the statistics. With 200+ separate tax breaks, you'd think we'd be a dynamo of new business startups and growth. But in real life we're 42nd on the Small Business Survival Index, 45th on the list of economic dynamism and dead last in growing young companies.
Two opinion pieces in the Register yesterday unintentionally highlight why it's so hard to fix the problem. A left-side piece by Charles Bruner and David Osterberg shows why businesses are reluctant to give up loopholes:
"Economic development" tax credits have grown much faster than general-fund expenditures in recent years, contributing significantly to structural weaknesses in Iowa's revenue system. Business tax incentives are projected to exceed $405 million in fiscal year 2010 - up 350 percent in just five years. These always deserve greater scrutiny, but especially in tough times.
They're right to point out that this is just spending. Unfortunately, they don't want to save money; they just want to spend it elsewhere:
At the federal level, noted economist Mark Zandi, who advised Sen. John McCain's presidential campaign, has cited the value of federal economic boosts by making direct transfers to low-income people and providing support to states for services and infrastructure projects. Such expenditures, according to Zandi, generate $1.36 to $1.73 in economic activity for every dollar invested.
It's the Younkers sale approach to the economy: the more you spend, the more you save!
On what passes for the right side of the spectrum, Ed Failor, President of Iowans for Tax Relief, the pre-emiminent state loophole lobby, says:
The budget mess needs to be cleaned up, and a quick fix will not work. Some lawmakers will choose to take the quick way out by suggesting the elimination of federal deductibility. Federal deductibility allows you to fully deduct all of the tax payments you have made to the federal government on your Iowa income-tax return.
If politicians take away this right, you will pay Iowa income tax on money that was withheld from your paycheck. You will be taxed by Iowa politicians on money you never had in your hands. Paying a tax on a tax is simply not fair.
It's what's in the cigar box that matters at the end of the day, not how it gets there. If the deduction for federal taxes were simply built into the rate structure by lowering Iowa rates by the amount of the federal tax benefit, the same amount would be left in your cigar box. More, actually, as every year some ill-advised or ill-starred taxpayers lose the benefit of federal taxes on the Iowa return because their federal tax payments are made in a year when they don't have Iowa taxes - for example, the year they move to Florida to escape Iowa's high tax rates (and blizzards). But the loophole lobbyists insist that we keep the loopholes in place to keep our taxes low, rather than switching to a broad-based, low-rate system. That's like clinging to your wheelchair instead of mending your broken leg.
If the legislature really wants to do something to make Iowa attractive, they should repeal the corporate income tax along with all of the loopholes. They should lower the individual rate and broaden the base by getting rid of the 200+ economic development exemptions and yes, federal deductibility. But that's not what they want. Nobody makes campaign contributions because they want low rates. They give money to legislators who enact loopholes just for them, so that's what we get.« Close It
A "Cedar Rapids landlord" who is said to own "hundreds of rental properties" in Linn County was convicted of two tax evasion counts last week as part of an insurance fraud scheme:
It took a Sioux City jury just two hours to convict Robert Miell on Friday.
The 54-year-old was convicted in U.S. District Court of filing false tax returns in an insurance fraud scheme from which he collected more than $336,000 for hail damage on 145 properties from American Family Mutual in 2001 and 2002.
Mr. Miell had already pleaded guilty to mail fraud and perjury charges. The entire indictment is here.
For your full roundup on the week in tax crime, Russ Fox is your man.
Tax non-compliance normally bad, but payroll tax noncompliance is probably the worst. A small business can get hopelessly upside-down in a hurry by not keeping up with its payroll tax obligations. Peter Pappas explains the five biggest mistakes he sees in managing payroll taxes. A taste:
One of the most common mistakes we see is the small business owner who uses his business bank account as his personal bank account.
This co-mingling of business and personal funds makes it difficult for the business owner to assess the profitability of his business and, therefore, assess his working capital needs. The inability to properly assess and provide for working capital requirements is one of the principal causes of the failure to make payroll deposits on a timely basis.
Read the whole thing.
Bottom-line then is this:
If you have a 2008 required minimum distribution that is payable in 2009 (before April 1st of 2009) because you turned 70½ in 2008, you must go ahead and make the payment in 2009 or you could end up paying the IRS a very nasty 50% excise tax on the amount not withdrawn--a catastrophic result when combined with the losses already incurred in 2008 from the stock market.
But if you turn 70½ in 2009 and would have had until April 1, 2010 to make the payment under normal rules, your 2009 RMD is waived even though it could have been made in 2010.
More on the RMD relief here.
A Minnesotan apparently came south to Des Moines for the winter.
That must mean it's even colder up there.
Instapundit has a running gag called "Name that Party," which points out instances where published reports omit certain relevant information when politicians of a certain persuasion face embarassment. We can play that game with this story about a Mississippi political consultant who will go away for eight months on federal tax charges:
GULFPORT — Political consultant Richard K. Buckman, who has helped several South Mississippi politicians win elections over the past decade, was sentenced Friday to eight months in federal prison after he pleaded guilty to two counts of willfully failing to file income tax returns.
U.S. District Judge Sul Ozerden also sentenced Buckman to one year of supervised release and 80 hours of community service. Ozerden ordered him to pay $182,000 in restitution to the IRS and a special $200 assessment.
Buckman’s sentence was to begin right away, officials said.
Surely the article says which Mississippi politicians hired Mr. Buckman?
Buckman operated Buckman & Associates in Gulfport and TCB Consulting in Washington.
Over the past 10 years he has worked in a number of South Mississippi political campaigns, including several mayoral races.
A reader could be excused for wondering which politicans hired a tax cheat, but the article is hopelessly coy, with nary a word about which politicians, or which party, used Mr. Buckman. It takes some determined Googling to come up with this, from a New Mexico blog:
A Democratic political operative from Mississippi who was paid $40,000 the state Democratic Party while dating the party’s executive director, has raised eyebrows among some party activists.
TCB Consulting, headed by Richard Buckman, 37, was contracted for “party building and fund raising” between December and September. During at least part of his tenure in New Mexico he was dating Vanessa Alarid, executive director of the state party.
So Mississippi reporters looking to track down some of Mr. Buckman's clients now have their field narrowed down to the Party That Must Not Be Named.
UPDATE: Maybe not. From the comments:
Buckman worked for candidates for both parties. I don't know of anyone in Mississippi who considers him a Democrat, but I would not call him a Republican either. He is just a mercenary con man.
House Ways and Means Committee Chairman Charles Rangel has held on for a convincing victory in our 2008 Taxpayer of the Year voting:
When the nation's chief taxwriter requires the services of a forensic accountant to figure out his taxes for the past umpteen years, it has to be a great comfort to all taxpayers who have paid negligence penalties for failure to keep adequate books and records. Congratulations, Chairman Charlie!
Still, some people think Charlie smells funny.
December is the traditional time for year-end tax planning. That's sensible, of course, but it asks a lot of one month to undo the other 11. When tax planning requires actual cash, it is best to spread the planning over the entire year. Here are some ways to get started on whittling down the income tax bill due April 15, 2010.
MAXIMIZE YOUR 401(k) CONTRIBUTION
The easiest way for most taxpayers to cut their tax bill without reducing their net worth is to increase their 401(k) payroll deduction. When you have your employer withhold extra from your 401(k) plan, you may reduce your current cash on hand, but the money is still yours - it's just in a different pocket. The earnings on the 401(k) aren't taxed until they are withdrawn for retirement.
Many employers match some or all employee deferrals. In that case, failing to use the 401(k) means you are turning down the boss's money. That's not just poor planning; that's crazy. The 401(k) limit for 2009 is $16,500; if you will be 50 by the end of 2009, you can add $5,500 to that.
FUND THE IRA NOW!
Most people ask about the last day they can contribute to an Individual Retirement Account. From a tax-planning standpoint, it's better to ask what the first day is for IRA contributions for 2009. The answer is Jan. 1, 2009.
If you make your $5,000 2009 IRA contribution now, rather than the last possible day (April 15, 2010), that $5,000 has an extra 15 1/2 months to earn tax-sheltered income. The limit for the 50-plus generation is $6,000. These limits apply to both Roth and traditional IRAs.
Maybe you don't have $5,000 sitting around waiting to be put in an IRA. If that's true now, it's not any less likely to be true 14 months from now. That means you should start putting a little aside each paycheck for your IRA; that's a better bet than waiting until the last minute.
CONSIDER YOUR WITHHOLDING AND ESTIMATES
Probably the worst part of a prosperous year is the tax bill at the end of it. This is especially true for taxpayers who have a lot of income not subject to withholding - S corporation or partnership income, for example, or self-employment income.
If you don't meet the tax law rules for withholding or estimates, you may find yourself with a non-deductible underpayment penalty. Many taxpayers with a big year-end bill don't have an underpayment penalty, but they still don't like writing that big check.
The tax law requires individuals to pay in through withholding or estimates the lesser of
-90% of current year tax, or
-100% of prior year tax (110% if your AGI exceeds $150,000 in 2008).
-Lower installments may be available if your income is seasonal or fluctuating during the year.
While it might be better theoretically to pay a big check to the IRS in April (as long as you don't have underpayment penalties), taxpayers rarely are happy to hear they owe the IRS. Unless you are confident you will be sitting on enough ready cash to cover your taxes in April 2010, you should have your payroll department make sure your withholding will be enough to keep you solvent at tax time.
May you have a prosperous and happy 2009!
Cross-posted from IowaBiz.com
Things are tough all over, and the hard times have reached Minnesota's critical exotic dance industry. First there was the guilty plea on tax charges by the owner of the King of Diamonds club. Now a Minneapolis dancer faces her own tax problems:
A former exotic dancer at a Minneapolis club has been accused by the Hennepin County attorney's office of hiding her financial assets from the Minnesota Department of Revenue.
Stephanie Antes, 28, of Albertville, has been charged with five felonies and a gross misdemeanor for failing to file and pay income on about $80,000 in tips per year that allegedly went unreported.
Antes worked at Rick's Cabaret in Minneapolis from 2004 to 2006, according to a statement by the Department of Revenue. Authorities began to investigate her finances after an anonymous tipster reported her to state revenue officials.
But fortunately for her, bailout efforts are underway.
Yesterday the Wall Street Journal had an odd story, Big Slide in 401(k)s Spurs Calls for Change. The narrative goes something like this:
"This is the biggest test that the 401(k) plan has seen to date, and it has failed," says Robyn Credico, head of defined-contribution consulting at Watson Wyatt Worldwide, noting that many baby boomers are ready to retire.
The obvious questions is, compared to what? Defined benefit plans, the few that are left, are invested in the same stock market, and they have the same problems. And no, there is no magic money tree that only defined benefit plans have to make good on their promises. They end up getting dumped on the taxpayers, via the PBGC, to the extent the plans are insured.
Many 401(k) opponents don't want to go to a company-sponsored defined benefit system; they want the government to take over the whole thing. To get a taste of how that works, many state pension plans are in deep trouble:
The value of pension promises already made by US state governments will grow to approximately $7.9 trillion in 15 years. We study investment strategies of state pension plans and estimate the distribution of future funding outcomes. We conservatively predict a 50% chance of aggregate underfunding greater than $750 billion and a 25% chance of at least $1.75 trillion (in 2005 dollars).
Arnold Kling gets to the point:
The only difference between amateur management and professional management is that the professionals get bailed out. Corporations will have to plow more earnings into pension funds--or else default on their obligations, in which case taxpayers will do the bailout through the Pension Bemefit Guaranty Corporation. And state and local pension plans, which also lost money, are going to be bailed out by taxpayers.
I fully expect to pay more in taxes to bail out other people' retirement losses than I lost myself in the market.
It seems unwise to look for financial security from a federal government that is going to start running trillion dollar deficits indefinitely.
President-elect Obama called for a $3,000-per-hire jobs credit in his speech yesterday. TaxVox has a useful discussion of a similar Carter-era credit:
The impact of the credit on jobs was slight. In many firms those who make hiring decisions did not understand the firm’s tax status. In addition, some time passes between the employment decision and the determination of eligibility for the credit.
Because the capital stock is fixed in the short run, to increase employment significantly, demand for output must increase. An incremental tax cut tied to employment will not by itself generate that increase in demand. Moreover, a temporary incremental credit is unlikely to affect significantly the long-run substitution of labor for capital.
There already is a "targeted" jobs credit, the Work Opportunity Credit. It's surprisingly difficult to convince clients to find out if any of their new hires qualify for the credit by reason of being on food stamps, being a disabled veteran, being an ex-con, and the like. When many employees don't even bother to find out if they qualify, it seems unlikely that it does much to get jobs for the "targeted" groups.
The polls close today in our Taxpayer of the Year Voting. While the man convicted of trying to settle his IRS exam by having the IRS agent killed and burning down the local office is creeping up in the voting, it's still Charlie Rangel's election to lose. Make your voice heard!
The "special task force" on Iowa's property tax system has issued a report calling for more municipal taxes, including municipal income taxes. This would, of course, be a compliance nightmare for Iowans and for those doing business here.
The report says the new taxes are needed to reduce the property tax burden, but they give their game away by only requiring 75% of the new revenue to go to property tax relief. Of course, it would be less than that, as the municipalities would quickly learn to game the 75% rule.
"Given the size and complexity of this problem, it should be no surprise that these solutions won't please everyone," said former Rep. Phil Wise, D-Keokuk, who retired from the Legislature after 22 years. "But we have made tough choices, and we have solutions that will work."
How about some real tough choices - like merging the 99 horse-and-buggy era counties into, say, 15, displacing 74 redundant sets of sheriffs, county recorders, and so on? How many businesses continue to deliver services using the same structure they used in 1846? Besides, Iowa, that is. Instead they propose to take more taxpayer money to preserve their power base, and they call it a tough decision.
I haven't found a link to the report itself, but I will add it when I do.
Two Louisiana lawyers were working with a landowner whose property was being condemned by the EPA. The tax law provides a break for condemnations, allowing the taxpayers to avoid taxes by rolling the proceeds into new property. Working with a tax advisor, they tried to become partners with the taxpayer on the land as their fee arrangement so that they could qualify for this favorable treatment.
The IRS took violent exception to this arrangement. They didn't just disagree with the treatment; they decided it was fraud. A federal jury disagreed, acquitting the lawyers of criminal charges, and now the Tax Court has also sided with the lawyers.
How does this cost the IRS $700,000? Because the IRS didn't assess the deficiency for their 1996 returns until January 2007. The IRS started their audit of at least one of the lawyers' returns in plenty of time to meet the three-year statute of limitations, which would have expired no earlier than April 15, 2000. It's entirely possible that the underpayments were large enough to trigger the six-year statute for large underpayments. But by throwing all of their efforts into a criminal prosecution, they apparently neglected the normal procedural steps to assess the taxes timely. They apparently felt there was no urgency because there is no statute of limitations for collecting taxes from fraudulent returns.
But the Tax Court ruled that the returns weren't fraudulent. The taxpayers reported the transactions clearly, consulted appropriate tax advisors, and cooperated with the IRS exam. So even though the attorneys misreported the income, the IRS foot-faulted away their chance to collect $700,000. The bottom line:
As a result of the paucity of badges of fraud in this case, we find that respondent has failed to show by clear and convincing evidence that petitioners filed their 1996 returns with the intent to evade tax. Therefore, the 3-year period of limitations under section 6501(a) applies to petitioners' 1996 tax year, and respondent is barred from assessing any deficiencies in petitioners' tax for that year.
Usually the IRS doesn't pursue criminal charges unless it has a very solid case. Unless there's more to the case than what shows up in the Tax Court opinion, it's a mystery why they did so here. What a nightmare that must have been for the defendants. While they ended up with a tax break they shouldn't have gotten, that seems like rough justice for having to go through an unwarranted criminal prosecution.
Cite: Loeb, T.C. Memo 2009-6.
Roger McEowen of Iowa State has a rundown of the most common mistakes he sees in estate planning:
So, what are some of the most common mistakes that are made in estate planning? There are many that could be listed, but here are my thoughts of what tops the list (in no particular order).
1. Too much property owned in joint tenancy (large estates) or too little
property owned in joint tenancy property (small estates).
2. Making the plan too complex.
3. Failure to review (and update if necessary) the plan.
And 14 more.
William Drennan, a law prof at good old Southern Illinois University-Carbondale, is exactly right about the execrable Section 409A deferred compensation rules:
Albert Einstein said "the hardest thing in the world to understand is the income tax." The new nonqualified deferred compensation rules are a testament to Einstein's brilliance. The new rules will fail to achieve their statutory purpose, will create traps for the unwary, and should be repealed retroactively.
Indeed they should. It won't happen, though, until somebody actually tries to enforce the section by imposing current tax, plus a 20% penalty, on income never received by employees as a result of a careless mistake made by an employer in administering the byzantine Section 409A rules. If the IRS ever gets serious about enforcing this mistake, it will make the efforts to get relief from the incentive stock option AMT rules look like a minor matter.
Meanwhile, small businesses, non-profits, and even school districts have to deal with this horribly-concieved response to the Enron and Worldcom scandals by shooting the remaining horses after one escaped the barn. That'll teach Ken Lay a lesson.
Via the TaxProf.
House Ways and Means Chairman Charles Rangel retains his commanding lead in the race for the Tax Update 2008 Taxpayer of the Year. Mr. Rangel, who distinguished himself by needing to hire a forensic accountant to figure his own taxes, has 63% of the vote so far in a six-man field.
The nearest competitor is Randy Nowak, who chose to deal with an IRS exam by hiring a "biker" named "The Reaper" to murder the IRS agent. I mean, who better to deal with a tax problem? Things went awry when "The Reaper" turned out to be the FBI agent, and Mr. Nowak now faces something much uglier than tax problems.
Polls remain open through Friday.
More on the candidates here.
The IRS has issued a nice set of Fact Sheets to start the filing season, including a summary of 2009 tax law changes. One of the most useful fact sheets is the one on avoiding preparer fraud. It includes this helpful information:
Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
Avoid preparers who base their fee on a percentage of the refund.
Use a reputable tax professional who signs the tax return and provides a copy.
Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.
Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied with the service they received.
These are helpful tips, but they are incomplete, so as a public service we provide these tips to avoid really bad preparers:
- Be cautious of preparers who say they can help you obtain a larger extension than other taxpayers.
- Avoid tax preparers who base their fee on the value of your jewelry.
- Avoid preparers who refuse to give you a copy of your own return on 5th amendment grounds.
- When you consider whether the preparer will be around to answer questions about the tax return, remember that prison visiting hours don't count.
- Check the person's credentials. Certified karaoke instructor credentials and rabies tags are normally not sufficient tax preparer credentials.
- Find out if the preparer is affiliated with a professional organization that provides its members with new identities and holds them to a code of silence.
- Ask friends and family whether they know anyone who has used a tax professional and whether they are satisfied with the sentence they received.
And have a great tax season!
You can still make your voice heard in our 2008 Taxpayer of the Year poll.
Lean about the candidates here.
Rioger McEowen explains the ins and outs of Iowa farm leases, including the tax implications cash rents and crop-shares.
Any owner-employee of a partnership or LLC in Massachussets, or any Massachusetts has to be regretting the failure of last year's attempt to repeal the state's income tax. Sole proprietors report their plan contributions ("Solo-k" and "Keogh" contributions) on page 1 of the 1040, rather than Schedule C. Partnerships don't deduct 401(k) contributions on behalf of their partners; instead, the partners have to deduct their company pension plan contributions on their own 1040s. Except in Massachusetts, they can't:
During 2008, the Massachusetts Department of Revenue (DOR) issued a directive which disallows partners and other self employed individuals a deduction for contributions made to their 401(k) plans. This directive is a clarification of an existing Massachusetts law that had not been enforced by the DOR for years. This directive does not apply to the employees of said businesses, just the owners. This will effectively increase the taxes of an individual contributing $15,500 to their 401(k) plan by $820
That will really help the old entrepreneurial climate.
Hat tip: BenefitsBlog.
Yes, it's time to start pulling together your tax stuff. You probably will have to wait for 1099s, W-2s, and maybe K-1s, but you can still start to get organized. Bruce the Tax Guy has an excellent checklist to get you started.
Come in from the cold for the new Carnival of Taxes at Kay Bell's place.
The incoming Obama team is marketing some tax breaks as part of its approximately $4 gazillion stimulus package. The centerpiece is refundable tax credits, also known as cash, for the "middle class," to be defined sooner or later.
The business portions of the tax plan are a rerun of the main elements of the 2002 Bush anti-recession plan:
- Bonus depreciation
- Expanded Section 179 deductions
- Five-year carryback of net operating losses (the current limit is two years).
This will be exciting news to Wells-Fargo, which may be able to generate some nice losses from its Wachovia acquisition, thanks to the controversial waiver of the built-in loss rules provided by Notice 2008-83.
Change we can believe in? If you believe the more things change, the more they stay the same, apparently.
The plan also calls for tax credits for hiring or retaining employees, which leaves the thinktankers at Tax Vox unimpressed:
Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today’s recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.
I can’t begin to imagine how the variation on this idea--credits for not laying someone off--would work. My head throbs at the concept of the IRS trying to administer a rebate based on intentions. Worse, these breaks would never work unless they are refundable and, to be honest, giving such credits to failing business makes my skin crawl. In reality, it would become yet one more bailout—only this time taxpayers wouldn't even get stock for their trouble.
More on the politics of the Obama plan at NextRight.
Greg Mankiw has a handy chart of the progressivity of all federal taxes, including payroll taxes, as measured by the effective tax rates (total taxes/total income):
You see some evidence for the proposition that the sliver of taxpayers at the top of the scale do better than the merely wealthy, but it doesn't appear to be a huge injustice in total.
Charlie Rangel has opened a wide lead in early voting for our 2008 Taxpayer of the Year recognition. So far he has 71% of the vote in a six-man field. Surprisingly, Robert Beale, the Taxable Talk Offender of the Year, has been shut out so far.
Yet there is still time to make your voice heard. For background on our worthy candidates, go here.
After you vote, you can check in with Peter Pappas, who has a poll for the worst tax cheat ever. You should also stop by TaxVox for their selection of the ten worst tax ideas of 2008. It must have been incredibly difficult to select only ten.
Kent Hovind, who ran a theme park based on the notion that humans and dinosaurs were around at the same time, failed to convince a federal appeals court of his theories of the tax law last week. The court upheld Mr. Hovind's sentence for wilfully failing to deduct and remit federal withholding taxes, and for structuring transactions to avoid cash reporting rules. His tax defense was based on the old tax-protester theory that he had to know exactly which code section required him to withhold for his violation to be willful. The 11th Circuit explained that it doesn't work that way:
The government proved that Kent knew the tax laws required the collection and payment of withholding taxes, but he refused to comply. Employees of Evangelism Enterprises, peers, and legal counsel testified that Kent disputed the authority of the Internal Revenue Service based on the separation of the church and state, debated the interpretation and application of the withholding requirements, and intentionally characterized Evangelism Enterprises as a "church" and his employees as "missionaries" to avoid tax obligations. Kent had opined to attorney David Gibbs that he was "smarter" than other church officials who had forfeited real property after they refused to collect or pay withholding taxes. Although Kent argued at trial that he was ignorant of the law and the Revenue Service failed to identify a law that required him to collect and pay withholding taxes, the jury was entitled to find that Kent knew about and deliberately violated the tax laws.
He'd surely have won the case if the proof of his tax theories was as compelling as this evidence of the co-existence of humans and dinosaurs:
We have neglected to run our traditional Taxpayer of the Year voting for 2008. In the interest of personal laziness, I will let you, the reader, help make the selection from my arbitrary slate of candidates. Vote early, vote often. We'll hold the polls open all week.
Details about the candidates are below the fold.
Charlie Rangel, who is perhaps the nations chief taxwriter as Chairman of the House Ways and Means Committee, failed to report years of activity from a rental property he owns, and has had to hire a forensic accountant to try to figure out his taxes.
Robert Beale, a Minnesota entrepreneur, skipped his federal tax evasion trial. Arrested after 14 months on the run, he was convicted not only of tax evasion, but of attempting to have the judge "arrested" under the jurisdiction of a home-made "common law court." He has already achieved Russ Fox's coveted "Tax offender of the Year" award.
Randy Nowak tried an innovative approach to handling his IRS exam: hiring a biker to kill the agent and burn down the local IRS office. Unfortunately for him, the "biker" known as "Reaper" was really an FBI agent.
Helio Castroneves is an Indy-car racer perhaps best known for his stint on "Dancing With the Stars." He is also accused of diddling with the tax law by hiding income offshore.
R&B star Ron Isley received a 37 month sentence for tax evasion; his campaign for a presidential pardon has so far come up empty.« Close It
A local government expert at the University of Iowa College of Law says a proposal before the Legislature that would allow local governments to assess an income tax is worth considering as a way for money-strapped cities to avoid cutting services.
Jeff Schott, program director of the Institute of Public Affairs, said it is better for cities to have diverse revenue streams.
Ah, the "diversity" argument. Of course, the first paragraph gives the game away - it's really about increasing taxes. But by wrapping it in the fuzzy cloak of diversity, maybe they think they can confuse the taxpayers until they are completely flummoxed by their municipal income tax returns.
Whatever this "expert" thinks, diversity isn't necessarily such a good thing here. Having the police department steal cars and sell the parts would diversify the municipal revenue stream. So would road trips into nearby farms to steal anhydrous to sell to meth labs. But except perhaps in Polk County, most municipalities wouldn't think such diversity is wise.
Predictability, reliability and ease of administration are more useful to municipal planners than "diversity." Income taxes are subject to wild swings based on the year-to-year performance of big local businesses, and on one or two rich guys moving out of town or dying. Property taxes, for all their faults, are the most steady and reliable taxes out there, and the counties know after 160 years how to administer them.
But the temptation is always to try to avoid tough spending choices by finding a new revenue source. It's much less fun to eliminate an unnecessary job for the county board chairman's nephew than it is to promise a new and improved convention center. The push for municipal income taxes is just another way to help keep officeholders from facing the hard part of their jobs.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to