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Tax Update Blog: June 2009 Archives

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It won't work. Let's do it!

June 30, 2009

Robert D Flach, providing his "final word" on why we should license unenrolled non-CPA preparers, says:

First and foremost, it appears that everyone on both sides agrees pretty much that registering and licensing currently "unenrolled" tax preparers (like myself) will do little, if anything, to cut down on fraudulent tax returns and unethical preparers.

Just as regulation of CPAs, lawyers, and doctors has not rid us of unethical members of these groups, regulation of tax preparers will not rid us of unethical tax preparers.

Alright then. It doesn't work, but we want to do it anyway. Maybe if I think about it long enough, it will make sense to me.

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FBAR filing due today!

June 30, 2009

20090623-1.JPGToday is the deadline for Form 90-22.1, the foreign financial account report -- otherwise known as the "FBAR" filing. There are severe penalties for failing to file this report on time, up to 50 percent of the value of the account for each year of non-reporting. Criminal penalties can apply to wilful violations.

As if to encourage the rest of us to file, the Justice Department last week announced a guilty plea for FBAR non-compliance by a client of Swiss bank UBS. The TaxProf has a roundup of coverage.

As this plea shows, offshore account secrecy seems to be crumbling. The IRS is offering an amnesty of sorts for those who haven't reported these accounts in the past, and it is very attractive compared to the consequences of getting caught for non-reporting. The amnesty runs through September 23, 2009.

The IRS has unilaterally extended today's deadline for new FBAR filers who have reported all of their foreign-source income but who did not know they had an FBAR filing obligation. Those taxpayers may file without penalty through September 23, but they need to follow special procedures.

If you are filing today, spend the extra four bucks or so and file Certified Mail, Return Receipt Requested. The IRS doesn't save the postmarks, so you need to.

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The 16th Amendment works in Iowa too.

June 30, 2009

Tax Protesters -- or "tax defiers," as they are now known -- like to argue that the 16th Amendment authorizing an unapportioned income tax was never properly ratified, and therefore there is no income tax. Unfortunately for them, the IRS, all federal judges, the U.S. Marshals service, and the Bureau of Prisons have a contrary view.

Elmer Scheckel of Oelwein, Iowa decided to give the argument a try to get out of Iowa income taxes. It didn't go well:

The argument advanced by the Protester is merely a variation upon a claim that has been repeatedly considered and rejected by state and federal courts for decades. The 8th Circuit Court of Appeals and other federal appellate courts from around the country have decisively held that “wages are within the definition of income under the Internal Revenue Code and the Sixteenth Amendment, and are subject to taxation

The Moral: Wishing doesn't make it so.

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Department of Cheap Grace

June 30, 2009

So President Obama was just joshing when he said there would be no tax hike on folks earning less than $250,000. His top aide, Chicago fixer David Axelrod, says those silly promises won't be allowed to stand in the way of the Greater Good. Joseph Thorndike calls this "refreshing":

Weasel arguments trying to square categorical pledges with political realities are dangerous. They encourage (more) voter cynicism and obstruct useful policy development. Better to simply acknowledge the reality. Which, after all, is not such an unpleasant one, at least for Democrats.

Which is why Axelrod's admission is welcome. It was also probably unavoidable -- trying to reconcile the health benefits tax with Obama's over-broad campaign promise was never going to fly. But it's still a step in the direction of political truth telling. Which is a refreshing change.

If welshing on campaign promises (less politely known as "lying") is refreshing, we've been well refreshed for lo these many years. What would really be refreshing is if politicians actually were honest before the election, while we could still do something about it.

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Pappas v. Flach

June 30, 2009

Lawyer-Blogger Peter Pappas yesterday listed "5 Slam Dunk IRS Audit Red Flags" increasing risk of an IRS exam. Robert D. Flach, the preparer-blogger from New Jersey, responded. Peter Pappas responds to the response.

UPDATE: And Flach takes another swing! UPDATE II: Pappas parries! And again!

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Will the Department of Economic Development call a press conference for this one?

June 29, 2009

They should:

Business exits Iowa over taxes

The money to subsidize Hollywood has to come from somewhere, but the state will learn that the non-subsidized chumps don't have to stay chumps. They can leave.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

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FBAR deadline relief for new filers

June 29, 2009

The IRS says that folks who didn't know about their foreign financial account ("FBAR") reporting requirements until recently, but who have reported whatever foreign income they have earned for 2008, may file their current report on Form 90-22.1 as late as September 23:

Taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.

Send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

In this situation, the IRS will not impose a penalty for the failure to file the FBAR.

Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed.



For everyone else, the deadline is tomorrow. If you haven't filed yet, used certified mail to document your timely filing today or tomorrow.

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Want to read all about preparer regulation?

June 29, 2009

I still need to address Robert D. Flach's thoughts on preparer regulation, but if you want to read all sides of the story in the meantime, Bruce the TaxGuy has put together a good roundup.

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Want to get to know an IRS agent?

June 29, 2009

Peter Pappas tells of "5 Slam Dunk IRS Audit Red Flags."

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IRS Issues Applicable Federal Rates (AFR) for July 2009

June 29, 2009

The IRS has issued (Rev. Rul. 2009-20) the minimum required interest rates for loans made in July 2009:

-Short Term (demand loans and loans with terms of up to 3 years): 0.82%

-Mid-Term (loans from 3-9 years): 2.76%

-Long-Term (over 9 years): 4.36%

Historical AFRs are available at the "links" page at www.rothcpa.com. You can also click here for the rates for prior months as reported in the Tax Update.

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Back at it, for now

June 29, 2009

The Tax Update is back online after a week in the north woods of Wisconsin with mighty Troop 280. While I was battling ticks and learning how to run a climbing tower, Michael Jackson and Dagny Taggart died. The House nearly achieved a first by passing a "Cap and Trade" bill before it was actually written. And a crash on the D.C. subway had a surprising tax angle. I'm still checking for ticks, but more posts will follow. Then I will fade out on a family vacation starting next week.

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Level playing fields?

June 26, 2009

Fine tax blogger Peter Pappas made this comment in his defense of proposals to license tax preparers:

I am merely suggesting that since CPAs, Tax Lawyers and IRS Enrolled Agents are heavily regulated (and by virtue of their education and continuing training are the least likely to engage in unscrupulous conduct) we ought to level the playing field and monitor the rest of the tax preparers, too.

The playing fields are bumpy already. While lawyers have to keep up a certain level of CPE and so on, that can be gamed. One of the most popular schools for lawyers in Iowa is the year-end bar association tax school held at the Marriot. It is popular because it provides lots of CLE in December, when the lawyers are running up against their deadline. It is also popular because it is broadcast closed-circuit in the hotel, so the lawyers can get their CLE without ever leaving their rooms. So the lawyers can do client work, or party, or sleep in, and still get their CLE. Most lawyers take their CPE seriously, but it would be astounding if everyone did. If lawyers can game CPE so easily, how hard could it be for a much larger cohort of licensed preparers?

In return for fulfilling their CPE obligations, the lawyers get a government-enforced monopoly on certain things. They get to draft partnership agreements, even if that really means blessing an agreement actually drafted by the CPA who actually understands the deal and the partnership rules. They get to do wills and contracts and so on. And with attorney-client privilege, they get to operate behind a veil that other preparers would kill for.

Meanwhile, CPAs have a monopoly of their own with the ability to bless audited financial statements. This naturally gives them an opportunity to get tax work ahead of other practitioners. They also get a brand name advantage from the "CPA" designation that drives other practitioners to distraction (in spite of the best efforts of some CPAs to wreck the brand). In other words, the playing field tilts both ways, if I may so butcher the metaphor.

It's in the interest of H&R Block and other private prepares to not screw up too badly; it's bad for business. It's not at all clear that creating an IRS preparer regulation bureaucracy will make things better. In this case, "making the playing field level" works a lot like "suppressing low-cost competition."

It is clear that licensing would cost millions of dollars that could be better used improving IRS information systems so they could spot suspect returns like the credit card companies spot suspect transactions.

Related: Yes, I still don't want to regulate preparers

Next week: is opposing regulation for others just another tool of CPA oppression?

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Wasting money: what's the big deal?

June 25, 2009

Excellent tax blogger Peter Pappas responded to my opposition to preparer licensing in the comments:

I am no way suggesting that the regulation of unlicensed preparers will permanently eradicate bad tax preparation.

I am merely suggesting that since CPAs, Tax Lawyers and IRS Enrolled Agents are heavily regulated (and by virtue of their education and continuing training are the least likely to engage in unscrupulous conduct) we ought to level the playing field and monitor the rest of the tax preparers, too.

The regulation doesn't have to be all that involved. It could be as simple as requiring tax preparers to register with the IRS and obtain a preparer number.

In order to renew their registration, each preparer might be required to prove that he or she has obtained a minimal level of continuing education credits necessary to keep up with changing tax laws.

What's the big deal?

...

I am proposing that these new regulations ONLY apply to non-CPA, non-lawyer and non-IRS Enrolled Agents who are already regulated under a different regulatory regime.

If you are not a CPA, lawyer or IRS enrolled agent, then, and only then, would you be required to register with the IRS.

My thoughts:

Peter says " It could be as simple as requiring tax preparers to register with the IRS and obtain a preparer number." But he immediately makes it not so simple by adding a CPE requirerement. That alone will require a major IRS bureau to monitor the CPE and registration of tens of thousands of preparers. The vast majority of the preparers covered will be honest ones that are trying their best to make a living helping folks through the tax maze. The dirty preparers will throw together fake CPE, or get cheap CPE credits online, and still continue to be dirty preparers. Except now they will be dirty tax professionals who can call themselves "Officially licensed tax professionals."

Whan has any regulatory regime not expanded? The next time a tax scam involves a lawyer or accountant -- and it will happen -- the IRS or some congresscritter will say the licensing regime should "at least apply the the minimum standards that apply to H&R Block" to lawyers and CPAs. Any new regulation scheme will eventually cover everyone.

What's the big deal? It will waste resources. The bad guys will quickly adapt to the licensing and go on being bad guys. The IRS will spend millions of dollars shuffling paper and bugging people who are late filing their CPE or whose paperwork goes astray. These millions would be better used upgrading IRS data analysis techniques to enable it to spot bad preparers by their data footprint. Cheaters leave tracks all over their returns; sophisticated data mining will be much more effective than collecting tons of CPE paperwork.

More tomorrow.

Related: Yes, I still don't want to regulate preparers

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Newton's Knopf Knocked for non-filing

June 24, 2009

Back in the day, Iowa lawyers were required to vouch that they had filed their tax returns every time they renewed their bar licenses. I wonder if that rule saved some attorneys from this sort of embarrassment:

Former Newton attorney R. Eugene Knopf has been sentenced to pay more than $26,000 in restitution after pleading guilty to two felony criminal charges for failing to file state income tax returns.

Knopf was placed on probation for five years after District Court Judge Glenn Pille suspended two five-year prison sentences and two $750 fines. He pleaded guilty in February to two of the four counts of fraudulent practice in the second degree, a class D felony, filed against him in April of 2008. His sentencing was on June 5 in Polk County.

According to court records, Knopf intentionally committed fraud by failing to file state income tax returns for four straight years — in fiscal years ending in 2001 to 2004.

Mr. Knopf's non-filing may go back as far as 1993.

There's something puzzling when a lawyer or CPA fails to file returns. Sometimes it's a symptom of a life that has gone off the rails. Sometimes it may be a sort of arrogance - they make their living manipulating the system, and eventually they think they can weasel out of any difficulty. Whatever the reason, it's a crummy way to end a career.

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April 15? Feh. Missing the June 30 foreign financial account deadline can be much worse.

June 23, 2009

20090623-1.JPGWhile the April 15 deadline for 1040s is ugly enough, there are a lot of ways to deal with it.  There are extensions, and even installment agreements.  If you miss the deadline, the late filing penalty tops out at 25 percent of the underpayment -- not fun, exactly, but often manageable. 

Now imagine that the penalty for filing a late 1040 were half the balance in your bank accounts, but no less than $10,000.  But that's outrageous - they'd never be that nasty, would they?

Yes they would.  And they are.  Just not for your 1040.

Foreign Bank Account Reports due June 30

The horrific penalty of 50 percent of the highest balance in a bank account for the year, but no less than $10,000, applies for late filers of Form 90-22.1, the Report of Foreign Bank and Financial Accounts. It is due June 30, and no extension is available.   What's worse, you might need to file the form -- sometimes called the "FBAR" form -- even if you don't own a foreign bank account.

You are required to file the FBAR if you are a "United States person" and you have either

- A financial interest, or
- signature authority

over foreign financial accounts exceeding $10,000 in aggregate

If your business keeps a bank account in Canada or China because you buy things there, the business needs to file -- as does everybody in your company with signature authority on such an account, down to the payables clerk who signs checks attached to your approved Chinese purchase orders.  An exception may apply to employees of some larger companies.

Of course you don't have to have a business to have a foreign bank account.  The FBAR requirements apply, for example, to personal bank accounts you might have opened while on a temporary overseas assignment.  They also apply to accounts with offshore gambling Web sites.

Be sure to document your filing!  FBAR filings must be postmarked no later than June 30.  While it is always a good idea to send tax filings Certified Mail, Return Receipt Requested, it's especially important with FBAR reports.  Practitioners report that the Detroit Service Center, where the reports are filed, throws away the postmarked envelopes the forms come in.  Then the IRS (outrageously) asserts penalties for forms that come in as early as July 2.  When that happens, a postmarked certified mail receipt, which costs $4.90, can save you $10,000 or more.

If you have missed prior FBAR deadlines, consider taking advantage of the current IRS semi-amnesty that runs into September.

This post originally appeared at Iowabiz.com, the Des Moines Business Record's blog for entrepreneurs.

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Off to Camp Tomahawk!

June 22, 2009

20090620-1.jpgThis week the Tax Update is in the wilds of Northern Wisconsin with my younger son's boy scout troop. I have robo-posts set to go up every day this week, enabling me to continue to beat the topic of preparer regulation to death while fighting mosquitoes in the woods.

I will be unable to address any comments or breaking news until I get back to the intertubes next Monday. Check out the fine tax nerds in the blogroll to your right if you need fresh tax goodness in meantime.

Flikr image of 1965 Scout Handbook courtesy Thomas Duchnicki

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Whither preparer licensing?

June 19, 2009

Everybody's talking about licensing tax preparers. My rant the other day against licensing drew two long and thoughtful responses in the comments, and other tax blogs are pitching in.

TaxGrrrl seems to be in my corner:

Therein is the problem: will certification actually improve tax compliance and reduce fraud?

Even if it would, how could the IRS possibly regulate the industry? In 2007, there were nearly 138 million individual federal income tax returns filed. Sixty-one percent of those individual federal income tax returns — about 84 million — were completed by paid preparers.

And how would we pay for it? The IRS is already underfunded.

Robert Flach, The Wandering Tax Pro, definitely is not:

It is my firm belief that one of the main reasons why CPA organizations are against the creation of a “licensed tax preparer” designation, via the regulation of unenrolled tax practitioners, is that this will once and for all do away with the misconception that only CPAs are qualified tax preparers.

Trish McIntire is sceptical.

Kay Bell watches from the sidelines, with lots of background and links.

I don't have time to give them the responses they deserve right now, but I think my original rant still stands up - I don't see where any of my points have really been addressed. It takes a great leap of faith to think that licensing will actually solve the problems it is supposed to address, and it takes no leap of faith at all to assume that it will be expensive both for the IRS and for tax prep customers.

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Crazy Train

June 19, 2009

Iowa City is making a pitch for enormous federal subsidies for train service to Chicago, reports Rado Iowa. They quote Rebecca Neades of the Iowa City Chamber of Commerce:

She says they believe about 187,000 people would ride the train every year. Neads says the train is a very appealing option. "It's a quick turnaround. It's only a five hour ride. The cost is very inexpensive, they're keeping it down at around 42 dollars and it's a very safe, economical, and environmentally friendly way to travel," Neads says.

She says the federal government could pay most of the more than fifty million dollar cost for the route because the midwest is largely underserved, and Illinois and Iowa are working together on the project.

There is so much wrong with this.

- Ridership of 187,000 assumes that everyone in Iowa City takes the trip three times a year, or that everybody in Iowa City and Cedar Rapids, the two towns in the area, rides once a year. It assumes over 500 riders a day, 365 days a year, between Iowa City and Chicago. That's a pipe dream. The two routes serving Iowa now had Iowa boardings at six stations totaling 64,260 in 2008.

- You can make the trip in four hours in a car and leave any time of the day you want, carrying as much stuff as you can fit in the trunk. On a train you can only leave once or twice a day, and only when Amtrak gets around to leaving. You can only pack only as much stuff as you can carry. And even if they are on time, it takes longer than driving.

- If Amtrak's own projections of costs for a route to Dubuque apply, the actual costs of the route will be three times the "economical" $42 ticket price.

But running empty trains is apparently "green," so this could happen in this age of easy federal money.

You can call it "Ozzy Osbourne environmentalism."

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Breaking news: If you give away money, people will take it!

June 19, 2009

Hollywood is flocking to Iowa's 50% filmmaker subsidy:

At least 58 proposed projects - mostly involving feature-length films - have applied to receive state tax incentives that are among the nation's most attractive, ranking 2009 as the high-water mark for movie-making interest in the Hawkeye State, state officials said Thursday.

"It's going great guns right now," said Mike Tramontina, director of the state Department of Economic Development. "We've had a big rush."

Wow. The state is running out of money, and it also shoveling it to subsidize carpetbagging filmmakers as fast as it can. Just... wonderful. Imagine how many other industries we could attract if the state paid 50% of their production costs. Sure we'd go broke(er), but imagine the economic development!

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Funding health care by killing drug research

June 18, 2009

House Ways and Means Chairman Rangel wants to pay for the upcoming health care fiasco by denying deductions for prescription drug ads.

I wonder where the congressman thinks the funding for new miracle drugs come from, if not from drug company profits? And does he think cutting advertising will help with that? Well, keep up the hard work.

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Ways and Means Chairman Rangel ponders health care funding at the rental house for which he failed to report rental income for 17 years. (NY Post photo)

Further coverage:

TaxProf
Tax.Com
Peter Pappas

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Larry and Tim's plan to regulate summer camp

June 18, 2009

Arnold Kling brilliantly summarizes the new financial regulatory proposals. He begins:

Once upon a time, there was a summer camp. To entertain the kids, the counselors handed out matches, lighter fluid, and newspapers. The camp burned down.

Afterwards, a white paper was written, proposing more supervision by counselors.

Mr. Kling's post isn't too big to fail, but it is too good to not read.

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Spending has been cut to the bone, so we have to raise taxes

June 18, 2009

Unrelated related news:

Fiscal agency foresees budget gap, lower 2010 revenues

It appears likely all the money in the state of Iowa’s wallet and all of its “overdraft protection” may not be enough to cover the bills coming due at the end of the fiscal year.

Based on current numbers, a Legislative Services Agency fiscal analyst predicted Tuesday the state will spend all of the $45 million ending balance legislators anticipated when they adjourned in April. Gov. Chet Culver has the authority to transfer $50 million from reserve accounts, but that may not cover the bills, the LSA’s Jeff Robinson said.

And:

Despite strained budget, state agency plans $25,000 event at golf tourney

But it's for "economic development," so it's not real money!

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Can Iowa tax nonresident sales of S corporation stock?

June 18, 2009

The answer should be "of course not." Unfortunately, a nonresident of Iowa had to actually protest an assessment before Iowa arrived at the right answer:

In this instance, there is no evidence that the stock was used by protester as in integral part of some business activity in the year of the sale. Therefore, the Department erred in apportioning the sale of protester’s ownership interest in Integrity to Iowa. As a result, the review unit will direct the Department’s collection section to cancel the assessment.

Except in very unusual situations, a sale of stock by an individual should always taxed only in the taxpayer's resident state.

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Norman Bates, call your office.

June 18, 2009

Mr. Pursik-Parkin, why have you been collecting your dead mother's social security benefits for six years?

"I held my mother when she was dying and breathed in her last breath, so I am my mother," Prusik-Parkin said when he was arrested, according to detectives.

But if he goes to jail, who will run the motel?

Via Peter Pappas.

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Tax shelters and the big lie

June 18, 2009

Federal Tax Crimes blog says The Big Lie is at the heart of the Daugerdas tax shelter indictment:

I have blogged before that tax shelter prosecutions are about the lie. Often, the claim is that the tax shelters lack economic substance, but in these prosecutions the real complaint is the lie that is designed to give an appearance of economic substance. The jury will not understand the complex, convoluted tax structure and byzantine legal analysis, but the jury will understand the lie.

Federal Tax Crimes Blog is all over this case.

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Yes, I still don't want to regulate preparers

June 17, 2009

Peter Pappas is taunting me in his post "Hialeah Florida Tax Preparer Indicted For Preparing False Tax Returns: Still Don’t Want to Regulate Tax Preparers?" He reports on the indictment of a Hialeah, Florida woman on 45 counts of preparing tax returns under the name of Cordoba Tax Services, and he adds:

People like Cordoba not only taint our profession, they steal business from us.

After all, what taxpayer wouldn’t hire a tax preparer who promises a large tax refund over a tax preparer who tells him the truth about his tax liability?

I say we put an end to this tomfoolery now by regulating non-CPA, non-lawyer and non-enrolled agent tax preparers thereby protecting the public and putting all tax preparers on a reasonably level playing field.

A few points in response:

20090617-2.jpg1. Plenty of regulated preparers cheat too. Just look at the KPMG and Ernst and Young tax shelter convictions. Or look back to the Anderson's Ark scam, which was full of CPAs. A licensing regime won't put an end to cheating preparers; it will just give them a government seal of approval until they are caught.

2. Getting indicted seems like a pretty stern form of regulation already.

3. A licensing regime spends most of its efforts shuffling the paperwork of honest preparers. This takes a lot of time and resources, and will inevitably involve screw-ups catching honest preparers in a bureaucratic maze. This increases costs for preparers and, ultimately, for taxpayers.

The resources spent hassling honest preparers would be better invested in improving the IRS ability to analyse its data. Dirty preparers leave a data footprint. Just as credit card companies spot suspicious patterns in their mass of data, the IRS should be able to spot suspicious patterns while processing returns, rather than by doing data runs after the fact -- if they even do that.

4. Two states already regulate non-CPA, non-lawyer, non-Enrolled Agent preparers. It's not clear that better preparation has resulted. While Oregon's licensed preparers were more accurate than the national average, according to a GAO report, California's were less so.

5. Unlicensed preparers fill a need. Tax is hard. When some single mom has to battle through her earned-income credit form, she needs somebody cheap and handy to help. Regulation will reduce the number of preparers and increase her costs, without getting her a better result.

6. The real problem is the tax law. As long as it continues to be a horrendous and confusing morass, even for relatively simple situations, there will be problems. The real way to improve compliance is to treat the tax law as a way to fund the government, not as the Swiss Army Knife of public policy.

While licensing might have some benefit in a few cases, it wouldn't be worth the cost, and the resources it will require would be better used elsewhere.

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

And thanks to Joel Schoenmeyer for saving me a word.


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Signal fades on IRS review of employee cell phone tax

June 17, 2009

20081230-2.JPGAs we noted in an update yesterday, the IRS has backed away from its review of the taxation of employer-provided cell phones. Instead they will ask Congress to repeal the Stone-a-Phone era rules that treat cell phones as a taxable perk like company cars.

Check out the TaxProf, Tax Grrrl and Kay Bell for the details.

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Summer Cavalcade

June 17, 2009

Get outside with your laptop, listen to some good music, and watch the new Cavalcade of Risk go by. This edition of the Blogosphere's roundup of insurance and risk-management posts is at Supporting Safer Healthcare.

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With health care "reform" all the rage, the post on health care cooperatives is timely, but the Cavalcade is full of good stuff.

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Cell phone kerfuffle heats up

June 16, 2009

The IRS request for comments on taxing employee cell phones has stirred up a hornets nest. The IRS said they were looking at three ways to deal with employee use of cell phones:

- a) Treat all employee cell-phone use as business use (so no amount has to go on the employee W-2)
- b) Treat 75% of use as business use; or
- c) Require statistical sampling of business use.

Most commentary zeroes in on the second alternative - taxing 25% of use as personal use to the employee. The Wall Street Journal says:

The IRS believes that some percentage of the costs incurred by employees using company-provided wireless devices should count as a "fringe benefit" and thus be subject to taxation. Since workers inevitably end up taking personal calls or emails, the thinking goes, it's only fair that they pay for the privilege. What's next? Maybe a per-cup tax on office coffee, or targeting furtive visits to ESPN or Hulu on the office PC? As one wag put it on the Journal's Web site, "It's like charging for the use of the company washroom."

Tax Grrrl is annoyed:

It’s called the potential to collect untaxed revenue. Seriously, IRS, we get it. You want our money. Stop trying to call it something that it’s not.

While the IRS would be foolish to go after cell phone use, the real culprit is Congress, which has never repealed the Stone-A-Phone Era rules that it enacted back when they were called "car phones" because you practically needed a car to carry one.

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More from the TaxProf.

UPDATE: IRS hangs up on taxing personal use of cell phones. Right answer. Statement here.


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Do you really know that your payroll taxes are paid up?

June 16, 2009

Stories like this chill the heart of the entrepreneur:

Felony charges were filed last week against a South Jordan tax preparer who investigators say withheld payroll taxes for his clients' employees and misrepresented what he had done with the money.

...

On top of the payroll tax allegations, Bankhead also is accused of creating and issuing false W-2 forms to victims after scamming more than $58,536 of their payroll taxes between 2002 and 2007, the tax commission said in a press release.

Many businesses couldn't survive if they had to pay a year's worth of payroll taxes a second time.

If you rely on a payroll service to remit your payroll taxes and they steal them instead, you still owe them, as far as the IRS is concerned. While it still is often wise to outsource a payroll department, it is always wise to sign up for the Electronic Federal Tax Payment Service. EFTPS participants can go online to make sure their payroll taxes are actually going to the IRS, instead of a crooked payroll provider's new house or a payroll clerk's account in Bermuda. Sign up for EFTPS and check your remittances regularly.

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I weep for my state...

June 16, 2009

...after looking at the list of top-selling hard liquors in Iowa:

1  	Black Velvet
2 	Captain Morgan Orange Spiced Rum
3 	Hawkeye Vodka         	
4 	Five O'Clock Vodka
5 	Jack Daniels Black Label.

No wonder we can't keep young people from moving away.

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Downtown Des Moines at breakfastime

Via TheBeanWalker.com.

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Is it better to be a lying schmuck in Iowa than Maryland?

June 16, 2009

Maybe. Marc Ward explains.

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FBAR Today at Iowa Biz

June 16, 2009

Today is Tax Update day at Iowabiz.com, the Des Moines Business Record's group blog for entrepreneurs. We discuss the June 30 deadline for foreign financial account disclosure and the horrendous penalties that can apply if you miss it.

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Expertise is important! Sometimes.

June 15, 2009

For tax preparers, anyway. That's why there is a move to impose a new worthless bureaucracy to regulate tax preparers:

Requiring paid tax preparers to register or become licensed would establish a national accreditation framework for the industry for the first time, with the goal of improving accuracy of tax filings and ending fraud that investigators say fleeces both taxpayers and the government.

“This is nothing less than a transformational shift,” Shulman said.

Sixty-one percent of individual tax returns are done by paid preparers, according to IRS Taxpayer Advocate Nina Olson, the chief ombudsman for U.S. taxpayers, who has recommended licensing of preparers since 2002.

“Untrained and unscrupulous preparers present a serious problem,” Olson wrote in a 2006 report to Congress.

20090615-1.jpgBut taxes are hard, and it wouldn't be fair to require everybody involved with the system to know about taxes. Certainly not the chief lawyer of the Department of Justice Tax Division:

Democrats on the Senate Judiciary Committee voted today to move ahead with the nomination of Mary Smith to head the Justice Department’s Tax Division, over Republican objections that Smith lacks significant relevant experience.

At a committee meeting, three Republican senators spoke against Smith, noting that she has never held a job specializing in tax law. She has never written or spoken on tax issues, does not have a specialized degree, and has never taken a continuing legal education course in tax law, said the committee Ranking Member Jeff Sessions (R-Ala.).

But hey, she's not preparing tax returns, so why would she need any credentials?

Related: Tax Gap Closer Obama Appoints Native American Woman with No Tax Experience to Head Up DOJ Tax Division

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Iowa issues first same-sex marriage guidance

June 15, 2009

Iowa's taxing authority took its first steps at dealing with tax filings by same-sex married couples in a press release issued last week. It pointed out that federal and Iowa filings will differ because the federal tax law does not recognize same-sex marriages. One important consequence: Iowa same-sex spouses don't have the option of filing single in Iowa:

For Iowa purposes, same-sex spouses have three options for filing their Iowa income taxes:

• A married filing jointly Iowa return;
• A married filing separately Iowa return; or
• A married filing separately on a combined Iowa return.

Same-sex spouses who file their federal taxes as head of household will generally not be eligible to file their Iowa taxes as head of household. Iowa’s use of the term “head of household” is based upon the federal definition, which generally allows the status only for unmarried people. Since same-sex spouses are married under Iowa law, with few exceptions, they are no longer able to file as head of household on their Iowa taxes.

This treatment is available starting in 2009; same-sex couples with extended 2008 returns will not be able to file as married for 2008.

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Buy local? We sell global.

June 15, 2009

"Buy local" is a common rallying cry. The "Buy Into the Circle" campaign of the Greater Des Moines Partnership is one example. Drew McLellan asks whether it makes sense today at IowaBiz.

It's really just a feel-good slogan. We're all part of a worldwide supply chain. Successful Iowa businesses have customers and competitors nationwide and overseas. There's nothing wrong with buying local if the price is competitive; if you buy from your own customers, that's common sense. But if you go broke because you fail to buy at the best price, you do nothing for the Iowa economy.

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Greetings, Federal Tax Crimes Blog

June 15, 2009

While I just noticed it last week, the Federal Tax Crimes blog has been rolling since February. Its proprietor is Jack Townsend, a Houston attorney who was a defendant attorney in the KPMG case. He has posted a good explanation of the recent indictment of Paul Daugerdas and six others in connection with Jenkens & Gilchrist tax shelters.

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Second quarter tax estimates due today

June 15, 2009

If you don't cover all of your taxes from withholding, remember to mail your second quarter tax payments today with Form 1040-ES. Trust payments are also due today, as are second quarter payments for calendar-year corporations.

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They got Capone Igor for tax evasion

June 12, 2009

Frankenstein would have been a different story if the peasants that came after the Monster and Dr. Frankenstein and his faithful body-snatcher, Igor, were IRS agents:

A former mortuary worker convicted of carving up and selling cadavers donated to the University of California, Los Angeles medical school was sentenced to 10 years in prison Thursday and ordered to pay more than $1.7 million in fines, restitution and unpaid taxes.

Jurors had found Ernest Nelson, 51, guilty of eight counts, including grand theft and tax evasion after a trial that detailed how he and Henry Reid, the former director of UCLA's Willed Body Program, conspired to sell body parts from donated cadavers to enrich themselves.

I'm picturing angry agents with laptops and briefcases storming the castle, but only between 8:00 a.m. and 5:00 p.m., and not on the lunch hour.

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Congress: Don't buy a car today, we're planning a sale.

June 12, 2009

Now that it has taken over Chrysler and GM, the government is devoting more time to developing auto promotions. They are clearly still learning.

The IRS this week said the deduction for sales taxes on the purchase of a new car would also be available in states without sales taxes. But at the same time, the House of Representatives pretty much wrecked that promotion by passing the largely-insane "Cash for Clunkers" bill, HR 2751. Buyers with any sense will now wait and see what sort of deal will come out of House-Senate negotiations before putting their money down.

The Detroit News says that the Senate has agreed to go along with the plan, which will provide vouchers of $3,500 or $4,500 for the purchase of a new vehicle with better mileage than the trade-in. A used car has to be a 1984 or later model with combined rated mileage of 18 MPG or less; there is no mileage floor for used trucks. No tax credits will be involved.

The $3,500 voucher is available:

- For cars with mileage at least 4 MPG better;
- For "Category 1" trucks, a 2 MPG improvement, and
- For "Category 2" trucks, a 1 MPG improvement.

I think "Category 1" covers light trucks, and Category 2 is for full-size trucks.

These relatively lame mileage requirements make it obvious that this is really more about throwing money at the auto industry than about saving fuel.

The $4,500 voucher is available:

- For cars with mileage at least 10 MPG better;
- For "Category 1" trucks, 5 MPG improvement, and
- For "Category 2" trucks, a 2 MPG improvement.

To keep your other neigbor with cars on blocks in his front yard from making out like a bandit, the bill requires that the trade in be:

(A) is in drivable condition;

(B) has been continuously insured consistent with the applicable State law and registered to the same owner for a period of not less than 1 year immediately prior to such trade-in.

There is no income limit in the House-passed bill. That means those of us who already own fuel-efficient cars get to pay taxes to give your neighbor with the Hummer $4,500 to trade in his old Cadillac Escalade on a Lexus Hybrid SUV. The program is expected to cost $4 billion.

For a primer of the unintended consequences likely to ensue from this insanity, go here.

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'How Business Gets Done'

June 12, 2009

I'm a published author, sort of. The Business Innovation Zone, a central Iowa small business development organization, has published "How Business Gets Done - Words of Wisdom by Central Iowa Experts," as a handbook for entrepreneurs. I wrote the tax chapter.

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The book was launched yesterday, and I got a free beer out of the deal. That and the prestige of the thing. You can order your copy at Lulu.com.

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Sac City bank embezzlement?

June 12, 2009

A Sac City, Iowa woman is charged with stealing millions from her employer, Sac City Bank. Radio Iowa reports:

The charges say Pickhinke sold more than 40 fraudulent C-D's from 1995 through 2008 while an employee of the Sac City Bank. She claimed the C-D's were being sold through the bank.

It's also alleged she opened bank accounts using the Social Security numbers of two bank customers who had died -- and then used those accounts to launder the money from the fake certificates she sold.

That's a much longer career than most bank embezzlers have.

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Well how hard can that be? She has a broken ankle!

June 12, 2009

"Grassley: Senate can tackle health reform, Sotomayor"

via thebeanwalker.com.

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Sometimes the underdog wins

June 11, 2009

People who represent themselves in Tax Court are up against the worlds biggest law firm - the Department of Justice. Yet sometimes they win.

New Yorker Robert Judge filed his returns for 2001 to 2004, but without paying the balance due. He worked out a payment plan, but then he defaulted. The IRS moved to levy on over $200,000.

He then tried to get the IRS to process an offer-in-compromise, the "pennies on the dollar" settlement touted on late-night radio. He filed a Form 433-A, a financial information statement designed to help determine how much tax you can reasonably be expected to pay. Then things went haywire. The IRS Appeals Office lost his form, but then moved ahead with the levy without letting the taxpayer submit a new one.

Yesterday the Tax Court told the IRS it "abused its discretion" by proceeding on the levy without getting the new Form 433-A:

We hold that the settlement officer's refusal to grant a brief extension for petitioner to correct the income information on his Form 433-A was an abuse of discretion and denied petitioner his right to a fair hearing. Petitioner's past cooperation with the Appeals Office persuades us that he would have timely submitted the revised financial information if granted an extension.

Mr. Judge is hardly out of the woods. He won, but all he wins is the chance to file a new 433-A with IRS Appeals to try to work out a new offer in compromise.

The Moral: You can win arguing your own case in Tax Court, but it's better to pay your taxes on time in the first place.

Cite: Judge, T.C. Memo. 2009-135

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Got crop insurance?

June 11, 2009

A beet farmer lost his crop to wet weather in 2001 and collected crop insurance. He tried to defer all of the crop insurance income to 2002 because he normally deferred 35% of his crop income by selling in the next year.

The IRS said no, he couldn't defer the income. The Tax Court agreed, and yesterday the Eighth Circuit upheld the Tax Court:

The legislative history, however, indicates Congress intended § 451(d) to ameliorate the effects of forcing farmers to report two years of income in a single tax year. Because of Congress' clearly expressed intent, the IRS's revenue ruling reasonably concludes only farmers who customarily defer all or a substantial portion of their crop income to the tax year following production were intended to benefit from a § 451(d) deferment of insurance proceeds.

In this instance, if the Nelsons deferred the insurance proceeds received in 2001, the problem Congress sought to resolve by enacting § 451(d) would not be avoided. Section 451(d) requires the taxpayer to defer all of the insurance proceeds if he makes the deferment election. Accordingly, the Nelsons would have been required to defer 100% of the insurance proceeds, even though their normal practice was to only defer thirty-five percent of the income from sugar beet production. Thus, in 2001 they would have paid tax on thirty-five percent of their sugar beet crop, but in tax year 2002 they would have paid tax on 165%

Roger McEowen has the details.

Cite: Jon W. Nelson, 08-2912 (CA-8)

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401(k) withdrawals: expensive money

June 11, 2009

Tempted to tap your 401(k)? Listen to the Wandering Tax Pro first:

Your 401(k) or traditional IRA or any other pension or annuity plan should be the very last place you turn to get cash for any reason – pretty much just before visiting the local loan shark.

Why? That cash is sitting there, after all, and I want some!

... depending on your various tax brackets, when you take money out of these types of plans you will be giving up to half of it to the federal, state and, in some cases, local governments!

Read the whole thing.

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California: where even the good news is bad news.

June 11, 2009

Good news in California: California Governor Floats Flat Tax

Not so good: He wants a 15% rate. Yeah, that will be popular.

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Used car sales tax break works even if your state has no sales tax.

June 11, 2009

Tax Grrrl has the scoop.

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Your taxes aren't going up, so stop complaining and pay your higher taxes.

June 10, 2009

Back in April, lapsed conservative Bruce Bartlett said the "Tea Party" protesters were just a bunch of partisan whiners with nothing really to complain about:

... it is hard to find evidence that taxes are rising or unusually high... I believe this was largely a partisan exercise designed to improve the fortunes of the Republican Party, not an expression of genuine concern about taxes or our nation's fiscal future.

But now, in his piece touting the "Value Added Tax," he says that higher taxes are inevitable:

Obviously, the recent explosion of stimulus spending has made the fiscal problem worse. We are already seeing countries like Great Britain having trouble selling bonds and being warned of downgrades by credit-rating agencies. The U.S. is not immune from such problems, which could cause interest rates to skyrocket, at which point a large tax increase will be politically inevitable. The only question will be how taxes will be raised.

So those Tea Party Yay-hoos with nothing to worry about should just get behind a great big honking value added tax. But remember, they have no real complaints.

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Is backdating the fatal flaw for Daugerdas?

June 10, 2009

daugerdas.jpgLooking over yesterday's tax shelter indictment of Paul Daugerdas and others, you can see opportunities for the defendants to argue that the IRS is trying to make them criminals for being aggressive advocates for clients in their tax practice -- merely for doing their jobs. That's debatable, but sometimes debatable is enough to avoid prison.

That's why this part of the government's case could be the most dangerous for the defendants:

In several instances in 2000 and 2001, J&G caused clients' tax shelter transactions to be incorrectly implemented at Bank A, which resulted in the wrong amount and/or type of tax loss to be generated for the clients. After the close of the tax year but before the respective tax return was to be filed, defendants PAUL DAUGERDAS and DONNA GUERIN, and Lawyer A, a co-conspirator not named as a defendant herein, discovered or were made ware of the errors and caused new transactions to be effectuated by Bank A through defendant DAVID PARSE and caused them to be backdated to the prior year.

If the government can prove backdating, it might be much easier for a juror to vote for conviction. Tax is hard, and a good defense lawyer has a lot of opportunities to give jurors a reasonable doubt in a case involving short sales, derivatives and currency options. But anybody can understand backdating. If the government convinces the jurors that backdating happened, it should be easier to sell the rest of the government's case.

Related: Tax shelter maven Daugerdas indicted

The Tax Grrrl has more.

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IRS is watching the detectives

June 10, 2009

Tax laws are laws too. A former D.C. police officer learned that the hard way:

Willie Borden, a former Washington, D.C., Metropolitan Police Department officer, pleaded guilty today to a criminal tax charge before U.S. District Court Judge James Robertson, the Justice Department and Internal Revenue Service (IRS) announced.

According to the court proceedings, Borden was the co-owner of B&B Security Consultants located at 1219 Good Hope Road, SE, in Washington, DC. B&B was in the business of providing security guards to various entities and events in the District of Columbia and throughout the metropolitan area.

Borden shared responsibility to collect, account for and pay over employment taxes for B&B. However, during 2002 through 2006, although Borden and his business partner withheld more than $2.1 million in payroll taxes from employee paychecks, they did not pay this sum over to the IRS, as the law requires.

Did he think nobody would notice?

It's pretty hard to withhold but not remit $2 million in payroll taxes without the IRS noticing.

After all, somebody is always watching.

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Dumb and dumber

June 10, 2009

Dumb:

The U.S. House has endorsed the "cash for clunkers" idea Congressman Bruce Braley of Waterloo proposed earlier this year.

"If you have a vehicle that gets less than 18 miles per gallon and you buy a new vehicle that has at least four miles per gallon of additional mileage economy, you are eligible for a $3500 voucher when you trade that vehicle in," Braley says. "If you get an increase in miles of gallon of at least 10 miles per gallon, you get a voucher for up to $4500."

So those of you who switched to an economy car long ago, now you might get to pay extra taxes to help that slug next door with the Hummer to buy a Prius. Chumps!

Dumber?

"There's something like 80 cities in the United States now trying to also build a streetcar system," said Brad Miller, general manager of the Des Moines Area Regional Transit Authority (DART).

Among them is Des Moines, which is considering applying for federal transportation dollars to help fund a DART-run streetcar route through downtown that would cost $100 million.

So there is no better use in this country for $100 million than to tear up the streets from downtown to the East Village to install technology that has been obsolete for 70 years that at most will carry a few hundred people per day, and maybe a few dozen?

But we need to raise taxes, because the government couldn't possibly use your money any more wisely.

Both stories via Thebeanwalker.com

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Tax shelter maven Daugerdas indicted

June 09, 2009

daugerdas.jpgPaul Daugerdas, who reportedly was paid $93 million from 1999 through 2003 as head of the tax shelter practice of law firm Jenkens & Gilchrist, was indicted today on federal tax charges. Six others were also indicted, including two former J&G partners and the former Chairman and CEO of national accounting firm BDO Seidman, according to the Department of Justice press release.

The indictment follows a series of guilty pleas by other figures in tax shelters associated with Mr. Daugerdas. Bloomberg.com reports:

The indictment stems from a wider U.S. probe of illegal tax shelters. On May 8, four current and former executives of Ernst & Young LLP were found guilty by a federal jury in New York of selling illegal shelters to wealthy clients. On June 3, former BDO Seidman LLP Vice Chairman Charles Bee pleaded guilty to federal charges that he helped clients evade more than $200 million in taxes through illegal shelters.

...

Bee’s plea in Manhattan federal court follows that of two other BDO Seidman officials, former Vice Chairman Adrian Dicker and ex-principal Michael Kerekes.

Bloomberg.com says the tax involved in the Daugerdas shelters is alleged to exceed $1 billion. The sentencing guidelines for a conviction with that sort of tax loss would start at 121-151 months.

UPDATE: TaxProf Blog roundup

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Tax Court upholds tax on debt forgiveness for two Eastern Iowans

June 09, 2009

It's easy to dig a financial hole by running up consumer debt. The tax law works to keep you down there, as two eastern Iowans found out yesterday in separate Tax Court cases.

Washington County Debt Wipeout

Timothy Fuller of Washington County in Southeast Iowa bought a used Pontiac Grand Am with his wife. They broke up, the wife didn't keep up her payments, and the car got repossessed. Eventually the finance company forgave the remaining debt and issued a 1099-C.

Mr. Fuller claimed that the debt forgiveness was excludible under the "insolvency" exception of Section 108. Under that section, debt forgiveness is excludible to the extent the fair market value of your assets before the forgiveness is less than your debts. Mr. Fuller argued his own case in Tax Court, and, unfortunately, it appears that he didn't put together good evidence of his insolvency (I have emphasized what I see as the key word):

We turn now to petitioner's argument that he was insolvent at the time of the discharge of the outstanding debt to Triad. In support of that argument, petitioner relies on his conclusory and uncorroborated testimony regarding certain assets that he owned at that time. We are not required to, and we shall not, rely on petitioner's testimony to establish the nature and the fair market value of each of his assets and the nature and the outstanding amount of each of his liabilities immediately before the discharge of the outstanding debt

Insolvent in Ossian?

Joseph Hakim is an entrepreneur in Ossian, near Decorah, where he runs a D.J. service and Mr. Computers USA. He ran up a credit card bill buying items for Mr. Computers USA and apparently had trouble keeping up with the payments. He worked out a deal with the bank, which forgave $7,239 of his balance. As is normal practice, they issued a 1099-C to Mr. Hakim.

Like Mr. Fuller, Mr. Hakim represented himself in Tax Court, and also like Mr. Fuller, he failed to produce evidence of insolvency strong enough to convince the Tax Court Judge:

We turn now to the documentary evidence on which petitioner relies. That evidence consists of (1) a list that he prepared shortly before the trial in this case of the assets and liabilities that he contends he had immediately before Advanta Bank discharged petitioner's debt (petitioner's list of assets and liabilities) and (2) certain Kelley Blue Book Web site printouts (Kelley Blue Book printouts) for certain models of certain vehicles. Petitioner's list of assets and liabilities is nothing more than a self-serving, conclusory, and uncorroborated list of the claimed fair market values of the assets and the claimed amounts of the liabilities that petitioner contends he had immediately before Advanta Bank's discharge of petitioner's debt. The Kelley Blue Book printouts show that book's values as of February 2, 2009, the date of the trial in this case, of certain models of certain vehicles that petitioner contends he owned immediately before that discharge. We are not required to, and we shall not, rely on petitioner's list of assets and liabilities and the Kelley Blue Book printouts to establish that petitioner was insolvent at the time of Advanta Bank's discharge of petitioner's debt.

Many taxpayers represent themselves in Tax Court, and sometimes they win. If you can't afford to pay your credit cards, it's likely that you don't want to incur lawyer costs. But if you are going to argue insolvency in Tax Court without a lawyer to help you get organized, you should be ready to spend a lot of time documenting the case.

You should start with a complete financial statement. It should list all of your bank accounts and debts at the time of the discharge, and each number should be supported by an account statement or confirmation from the lender (note the word "uncorroborated" in the Judge's rejection of the taxpayer's evidence). You should list all of your assets, including cars, with a statement of condition, photos, and a well-documented value. You should list your real property, with its assessed value and with recent comparable sales. You should list any other personal assets and liabilities. Finally, you should make sure all of the values you use tie out to your supporting documentation, and that the financial statements don't have math errors.

The Moral: it isn't easy to convince the Tax Court that you are insolvent. If you are going to try, you need to have your homework done before you show up in court.

Cites:

Fuller, T.C. Summ. Op. 2009-91
Hakim, T.C. Summ. Op. 2009-92

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Licensing tax preparers?

June 09, 2009

Kay Bell examines the IRS trial balloon about licensing tax preparers, along with commentary from around the tax blog world.

I think it would just tie up resources to run a licensing bureau that would be better spent on improved computer tools to identify fraudulent filing patterns, and on faster enforcement action on bad preparers.

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A deduction to avoid an exemption?

June 09, 2009

TaxGrrrl covers the deductibility of birth control costs.

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Foreign bank account reporting deadline looms

June 09, 2009

William Perez reminds us that foreign bank accounts must be disclosed by June 30 on Form 90-22.1. This form is required for both owners of such accounts and those with signature authority over them.

The form must be mailed separately from any tax returns. Be sure it is postmarked by June 30; the penalties for failure to file are atrocious.

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Downtown still hides under the blankets

June 09, 2009

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Principal Park and the confluence of the Raccoon and Des Moines rivers sleep late under a foggy blanket this morning

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Sorting out the Tribune Mess

June 08, 2009

Real estate mogul Sam Zell tried to work his magic on the Chicago Tribune. Chapter 11 quickly ensued, and now the meter is spinning frantically as a raft of professionals work to sort out how to turn the company over to creditors without committing a tax disaster.

Today a good article in the Trib itself lays out just how complex the restructuring could be:

Tribune Co. employees own 100 percent of the company's equity through an arcane, tax-advantaged corporate structure known as an S-Corp ESOP. But a tangle of S-Corp rules would make it difficult to give the senior lenders equity and maintain the S-Corp structure.

Among other things, an S-Corp can have only 100 shareholders, and they must be individuals, not corporations. A retirement plan like an ESOP, which can have thousands of members, is permissible. But a lender like JPMorgan would be prohibited, and Tribune Co.'s senior lender group has more than 100 members anyway.

Zell's team has argued to creditors that keeping the S-Corp structure adds value to the company. It shelters Tribune Co. from paying income taxes and facilitates the company's ability to spin off assets without paying capital gains taxes. Last year, for instance, the structure helped Zell's team construct a tax-advantaged deal to unload Newsday newspaper in New York for $650 million. It also is figuring prominently in plans to shelter Tribune Co. from a big tax bill stemming from its pending sale of the Cubs.

The article explains that the S corporation could drop the assets into a partnership with the S corporation staying in existence as a partner, but then you have to figure out how to get funds to the S corporation to pay the loan it probably has taken out to buy Tribune stock.

Even with the best of counsel, there will be tax risks in this complex structure. In 2005 The Trib lost a billion-dollar case involving its sale of Matthew Bender. The IRS is already examining their ESOP structure for the possibility that it was an improper setup to begin with.

Bankruptcy counsel. ESOP attorneys. S corporation mavens. Partnership tax experts. We're not talking cheap, especially at Chicago rates. And no matter how much you pay the professionals, you still don't solve the big problem: how you make money with a newspaper in the era of Craigslist and internet via mobile phones.

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An ideal taxer's conservative

June 08, 2009

Lapsed conservative Bruce Bartlett now advocates a value-added tax as "an ideal tax from a conservative point of view."

This may be the first in a series from Mr. Bartlett, including:

- Ideal cigars from the point of view of someone with emphysema;
- Ideal pollens for allergy victims
- Ideal Twinkies for fat people
- Ideal whiskeys for alcoholics.

Related: Bruce Bartlett: shut up and pay up, you whiny little people

Via the TaxProf

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Next up: taxing employee use of paper clips

June 08, 2009

20081230-2.JPGBack when cell phones were a status symbol, Congress enacted rules requiring special substantiation the use of of employer-provided cell phones. Technology marches on, and cell phones are now common even in homeless shelters, but Congress has never updated its rules. As a result, the IRS is now updating its rules for employer-provided cell phones. Notice 2009-46 (page 13 of the link) offers three alternative proposals for dealing with this obsolete rule:

- a) Treat all employee cell-phone use as business use (so no amount has to go on the employee W-2)
- b) Treat 75% of use as business use; or
- c) Require statistical sampling of business use.

I vote "a." There's no way that the taxes raised by tracking cell phone use, or by putting it on W-2s, exceed the compliance cost.

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The pitfalls of using tax returns for social work

June 08, 2009

Iowa's 2008 returns asked taxpayers whether they had uninsured dependent children. The results are a mess, reports the Des Moines Register:

A preliminary analysis by the Iowa Department of Revenue shows that about twice as many families as expected reported that they had uninsured dependent children in their households. However, experts caution that they are not yet sure if everyone understood the question, or how many of those dependents are younger than 18 and poor enough to qualify for public programs.

The uncertainty doesn't deter State Senator Jack Hatch (D, Rehabcreditville) from calling the question a success:

Hatch, a Des Moines Democrat who has led efforts to expand health care coverage, said he was surprised but not upset by the new numbers. "What's encouraging to me is that the use of tax forms is giving us real, legitimate, accurate data," he said.

It's data, all right, but the "accurate" part is doubtful. Even so, the question will be mandatory on 2009 returns.

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Non-filing probably isn't his biggest problem now.

June 08, 2009

The guy accused of murdering the abortionist in Kansas has a history as a tax protester, reports Peter Pappas. When somebody isn't deterred by murder laws, it's not too surprising that he isn't intimidated by tax laws either.

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Learning from the Joker

June 08, 2009

Bruce the Tax Guy says we can learn from the estate planning mistakes of "Batman's" Heath Ledger:

I recently learned that actor Heath Ledger had no previsions in his will for his infant daughter. A family battle ensued over his assets.

That's not a funny result, Joker. What to do?

What you can do to see that things are truly handled to your wishes is create an estate plan and keep it updated, no matter your net worth. Keeping you estate plan updated is critical. Poor planning can destroy a family with strife and bitter feuds among those who are or think they should be beneficiaries.

Indeed. Read the whole thing.

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1 million

June 08, 2009

Sometime over the weekend our counter for "page views" here rolled over 1,000,000. That's a good week for the big boy blogs, and it has taken us since October 2003 to roll this up, but still it's a nice round number. Thanks to everyone who stops by here. Please tell your friends!

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Press release economics

June 07, 2009

Iowa, along with other states, promotes economic growth by taking your money in taxes and using it to lure and subsidize your competitors. If you wonder what motivates such foolishness, you should read the discussion of "press release economics" at "Injustice of State Subsidies" on the Cato blog.

I like this part:

Anyhow, journalists should be on the lookout for more press-release economics schemes coming from the states as revenues remain tight and politicians become desperate to demonstrate they’re "doing something." Journalists should examine a state’s tax structure when a taxpayer giveaway is announced to see if perhaps the governor is masking economic-unfriendly fiscal policies.

Will The Newspaper Iowa Depends Upon begin to speak truth to power?

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Related: What Microsoft and Apple can agree on

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So how's that stimulus thing working out?

June 05, 2009

Not so well:

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The blue lines were the administration's projection of what would happen with the stimulus package enacted earlier this year, and what would happen without it. The red dots show what has happened so far.

Via Innocent Bystanders.

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IRS moves to regulate preparers

June 05, 2009

The IRS announced a project that is likely lead to an IRS licensing process for tax preparers. Lawyer-blogger Peter Pappas is all for it:

While I am sceptical of government regulation, I think this is an area that begs for it.

We have had many clients come to us over the years who have been duped by unscrupulous or merely incompetent unlicensed tax preparers.

There is no shortage of “tax preparers” out there who illegally promise their clients large tax refunds in order to get their business.

I'm not enthused. While there are plenty of abusive preparers out there, the IRS already has severe penalties that it can impose to deter and shut down abusers. If the current amount of bureaucracy isn't effective, more and bigger bureaucracy probably isn't the solution. All it will do is create more annoyances for legitimate preparers while raising compliance costs for taxpayers.

In the near term, a more active and effective IRS process to detect abusers, and a more streamlined process to address them, strike me as better answers. The long term solution is a simplified tax law that doesn't try to do everything from promote energy efficiency to encourage college savings -- in other words, a tax law that doesn't require everybody to go to a preparer.

The TaxProf has a roundup.

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Anniversary Cavalcade!

June 05, 2009

The third anniversary edition of the "Cavalcade of Risk" is up!

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The Insure Blog, the fearsome power behind this compilation of insurance and risk management blog posts, hosts. Check out their post on risky lifestyles.

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Celebrity financial consultant indicted on tax charges

June 05, 2009

The former CEO of an investment firm with A-list clients including Bill and Hillary Clinton was indicted yesterday on tax charges. The New York Times reports:

The executive, Jeffrey I. Greenstein, is a former chief executive and a co-founder of the Quellos Group, whose core business was bought by BlackRock for $1.7 billion in 2007. He faces 18 counts of conspiracy, fraud and tax evasion.

Quellos, which was based in Seattle and catered to wealthy investors, had star clients, including former President Bill Clinton and his wife, Hillary Rodham Clinton; Robert Wood Johnson IV, the owner of the New York Jets football team; and the Hollywood mogul Haim Saban, the producer of the “Mighty Morphin Power Rangers” children’s show, according to public records.

The charges arise from basis-shifting tax shelters like those involved in the recent BDO guilty pleas Look for lots of finger-pointing and a blame-the-accountants-and-lawyers defense.

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We need newspapers because...

June 05, 2009

...they fearlessly speak truth to power!

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Kim Jong-il could hardly get more adoring coverage. Also check out the bland acceptance that money from Uncle Sugar will "revive" low-income housing, as opposed to "enrich politically-connected homebuilders while increasing the number of unsold homes."

Surprisingly, the "beams of inspiration" do not emanate from the President's eyeballs.

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What Microsoft and Apple can agree on

June 04, 2009

While the Microsoft and Mac guys have their differences, they can agree on one thing: corporate welfare is fun!

Microsoft, of course, has received about $40 million in Iowa tax breaks for the as-yet-unbuilt stack of shipping containers server farm in West Des Moines. Now North Carolina has voted $46 million to subsidize an Apple server farm.

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What Microsoft and Apple talk about between takes?


Meanwhile, Roth & Company is still looking for its $28 million.

Update, 6/5: more from TaxGrrrl.

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Another BDO partner makes a tax-shelter plea deal

June 04, 2009

A former vice-chairman of national accounting firm BDO Seidman has pleaded guilty to tax evasion charges. Charles W. Bee Jr., a leader of the firm's "Wolfpack" tax-shelter group, has pleaded guilty to charges arising out of shelters put together in cooperation with the Jenkens & Gilchrist law firm.

Another "Wolfpack" leader pleaded guilty to tax-shelter-related charges in March.

The deep waters may be closing over Paul Daugerdas, the Jenkens & Gilchrist tax attorney at the center of many of these deals.

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Des Moines franchise fee ordered refunded

June 04, 2009

Des Moines residents will get their "franchise fee" surcharge on their utility bills refunded:

A Polk County judge on Wednesday ordered Des Moines city officials to refund millions of dollars in franchise fees to residents who have paid gas and electric bills over the past decade.

Critics of the fees said the amount could approach $50 million when interest and court fees are added.

The 5 percent surcharge, tacked on to customers' bills, has been at the center of a five-year legal battle that city leaders vowed to continue in the wake of Judge Joel Novak's ruling.

The state legislature this year passed legislation allowing the fee going forward, but that didn't affect the old years.

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Here comes the big honking tax increase III

June 04, 2009

Tax Analysts reports ($link) "Bernanke Says Congress Should Consider Tax Increases to Restore Fiscal Balance"

Of course. How could we possibly ever cut spending?

Testifying before the House Budget Committee, Bernanke warned that tax rates should not be set "so high as to impede economic growth." But, he said, "I think Congress will want to look at both the spending and the tax side" when considering how to achieve a more balanced budget.

They may "look" at spending, but they won't cut any. Not when we need to bail out GM, Chrysler, California, and so on, while taking over the health care sector and "stimulating" spend-happy politicians everywhere.

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More from the Wall Street Journal.

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Payroll tax troubles for Kerry campaign?

June 04, 2009

IRS files an $800,000+ lien against the Kerry 2004 presidential campaign, prompting millions of Americans to wonder, "Who is 'Kerry'?"

The campaign says the IRS is wrong.

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Big offshore tax shelter indictment...

June 04, 2009

...expected today in Seattle.

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Politicians voting to take more money = "gutsy"?

June 04, 2009

Because it's not possible for Illinois politicians to spend too much, so taxes must be too low.

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Sure we lose money, but think of the jobs!

June 03, 2009

The race to throw money at Hollywood continues:

Many states that are cutting spending on schools, roads and other basics have been lavishing hundreds of millions of dollars in incentives on Hollywood studios to lure TV and movie productions — this, despite scant evidence that taxpayers come out ahead on such deals.

An Associated Press survey found that states competing for projects handed out $1.8 billion in tax breaks and other advantages to the entertainment industry from 2006 through 2008.

Iowa's 50% film credit may be the most extravagant in the nation, especially when combined with tax forgiveness for vendors serving the carpetbagging film companies.

Why do the politicians take your money to give it to Hollywood? If this one is any indication, it's because they are out of their minds:

State Sen. Tom George said he supports Michigan's incentive program because of the production activity it has drawn to his job-starved state. But he has no illusions about whether Michigan brings in more tax revenue than it gives away.

"We don't get back what we pay out," said George, a Republican who wants to cap the annual payout, either on a per-film or per-year basis. "We don't even get back half of what we pay out. I don't even know if we get back a quarter of what we pay out."

And that's from a supporter of the giveaways...

Related: We're broke? Lets take all of our money and go see a movie!

Via the Taxrascal's twitter feed.

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Nice silo.

June 03, 2009

A property in Garnavillo, Iowa is up for auction by the IRS.

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The house isn't much to look at:

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The silo looks nice, though.

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The auction is slated for July 10.

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But do the students pass the CPA exam?

June 03, 2009

The TaxProf reports:

Here are the Top 27 university accounting programs by tax research, based on citation counts in top peer-reviewed journals over the past six years:

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That's all nice, but students looking at an accounting school have two more important questions to ask:

1. What is the pass rate for students taking the CPA exam? And,
2. Where do the graduates get hired?

The research bit matters mainly to profs jockeying for tenure. It would be interesting to see whether there is any correlation between the two metrics that matter and these research scores, but I find no internet rankings of CPA exam pass rates for colleges and universities.

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Because they like empty storefronts

June 03, 2009

From the Globe Gazette:

The City Council of Iowa City has voted to bar the opening of new bars and liquor stores in the city's downtown area.

Because downtown Iowa City needs more retail space.

Via thebeanwalker.com

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We're Area 5!

June 03, 2009

The IRS announces "Open Meeting of the Area 5 Taxpayer Advocacy Panel (Including the States of Iowa, Kansas, Minnesota, Missouri, Nebraska, Oklahoma, and Texas)"

The Area 51 meeting should be fun.

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We're broke? Lets take all of our money and go see a movie!

June 02, 2009

Unrelated-yet-related stories:

Iowa revenue takes double-digit plunge in May

A spike in state tax refunds and continued negative economic factors caused a double-digit plunge in May’s state revenues, state officials said Monday.

The decline raised new concerns whether the revised fiscal 2009 state budget would hold without additional adjustments, although Gov. Chet Culver’s fiscal experts cited warning signs but no cause for alarm as they closely monitor the financial balance sheets.

And:

Film Industry taking off in Iowa

"The tax credits were the lure, but the people were the ultimate reason we came here. It's a great location with great people, and the tax incentives were icing on the cake," says Whitus.

Yes, great people who elect politicians stupid enough to subsidize half the filmmakers' costs.

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Waking up from a trucker's dream

June 02, 2009

The IRS has won an injuction against the Humboldt preparer accused of inflating deductions for her trucking clients. From the DOJ press release:

The suit alleges that Lemmon claims improper deductions on customers’ returns for charitable contributions and employee business expenses. According to the complaint, the IRS has examined approximately 243 returns that Lemmon prepared and found that 224 of them understated the customer’s tax liability. The complaint alleges that the tax loss from Lemmon’s alleged misconduct between 2003 and 2008 could be as much as $17 million.

While it is only a "preliminary" injunction, it has to be a terrible blow to her practice, as it is unlikely that she would be able to get the injunction lifted in time for next tax season.

Link: Copy of injunction

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Supremes to look at tax patents

June 02, 2009

The U.S. Supreme Court will review the propriety of granting "business method" tax patents, including tax patents. Des Moines patent law blogger Brett Trout explains:

1. Whether the Federal Circuit erred by holding that a “process” must be tied to a particular machine or apparatus, or transform a particular article into a different state or thing (“machine-or-transformation” test), to be eligible for patenting under 35 U.S.C. § 101, despite this Court’s precedent declining to limit the broad statutory grant of patent eligibility for “any” new and useful process beyond excluding patents for “laws of nature, physical phenomena, and abstract ideas.”

2. Whether the Federal Circuit’s “machine-or-transformation” test for patent eligibility, which effectively forecloses meaningful patent protection to many business methods, contradicts the clear Congressional intent that patents protect “method[s] of doing or conducting business.” 35 U.S.C. § 273.

Patents for tax strategies are hugely unwise. It's hard enough to keep up with the tax law without having to also worry that you might be violating some patent by the way you file your tax return. With FIN 48 disclosure requiring companies to make elaborate disclosures of their tax situations, patent trolls will inevitably look for opportunities to shake down companies on the basis of barely plausible arguments of patent violations.

The TaxProf has a roundup.

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Governmental dementia

June 02, 2009

One of the sad signs of dementia is the way old folks forget the recent past. The government itself seems to be coming down with Alzheimers.

Kay Bell reports on how the first-time homebuyer credit is now being used as a government-sponsored down-payment assistance program -- an entirely predictable development.

Doesn't anybody remember how we got into this mess in the first place -- easy money and no-money down mortgages? Why are we trying to pump up a popped housing bubble?

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Let's pretend it's not raining carnival

June 02, 2009

Sure, it's going to rain all day, but it's always dry and sunny at Kay Bell's Carnival of Taxes!

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This edition of this Carnival of tax posts from around the blog world includes our old friend The Wandering Tax Pro

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