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Tax Update Blog: January 2010 Archives

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Iowa: no crazy train for you!

January 29, 2010

Supporters of hugely-subsidized rail passenger service in Iowa were disappointed when their dreams of Soviet Amtrak service to Iowa City and Des Moines were reduced to four remote controlled crossovers in southern Iowa.

But when it comes to getting federal money for obsolete technology, the dream never dies:

But train supporters, including Gov. Chet Culver, said they won't give up their efforts to upgrade passenger rail service in Iowa.

"With the work we have already done, we will be competitive for future rounds of funding," Culver said.

As we have pointed out, advocates for expanded passenger rail rely on passenger demand projections that make the original forecasts for wildly profitable harness racing in Iowa look realistic. For example, the Iowa City route is "projected" to have 187,000 riders annually. 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.

Not only does the obsession with the delusion of efficient rail service waste your money, it actually damages more practical forms of mass transit. For example, transportation planners in Des Moines want to move the current bus lines, which now discharge in the middle of the business district next to the skywalk, to a new terminal down by the railroad tracks, to accommodate trains that will never come. This would force the thousands who actually use existing mass transit to walk through the rain, snow and ice three blocks for the convenience of the imaginary train riders.

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Approximate location of proposed downtown Des Moines bus-rail hub.

Still, the central planners are undaunted:

Tom Kane, executive director of the Des Moines Area Metropolitan Planning Organization, said the federal grant decisions were a setback for Des Moines. That's because passenger train service can't be restored to Des Moines until a train begins operating between Chicago and Iowa City. Metro officials hope once that happens, passenger train service can be extended from Iowa City through Des Moines to Omaha.

"This decision is a blow to us," Kane said. "We need a transportation system that gives us choices - a combination of air, road and rail. This is a disappointment, but it will not diminish our interest."

Des Moines hasn't had regularly scheduled passenger train service since May 31, 1970, when the Rock Island Lines' Cornbelt Rocket train ceased operations. The Cornbelt Rocket ran between Council Bluffs and Chicago.

So we "need" something we've done without for 40 years. Maybe Grandpa was right 40 years ago when he figured out that people wouldn't pay enough to ride trains to come close to covering the costs of running them. Yet those who like to indulge nostalgia with your grandchildrens' tax money won't let that stand in their way.

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You might as well celebrate, since you're paying for the party.

January 29, 2010

It's Earned Income Tax Credit Awareness Day. This is traditionally celebrated by having your drinks paid for by somebody with a credit card who doesn't know he's buying.

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Seeking redemption

January 29, 2010

Do you believe that the government has a secret account in your name with millions of dollars in it, just waiting for you to file the right forms to claim it? If so, you might be dumb enough to hire a preparer like Karen Liane Miller of Nashville, Tennessee:

According to the government’s filings, Miller repeatedly prepared federal income tax returns claiming bogus refunds in "astonishing" amounts, based on a tax fraud scheme known as the "redemption" scheme. The court previously found that Miller prepared and filed 41 income tax returns for customers in 2009 claiming more than $8.3 million in fraudulent refunds. The court said that the redemption scheme is based on a frivolous theory that the federal government maintains secret accounts for its citizens, and that taxpayers can gain access to funds in those accounts by issuing IRS 1099-OID forms to their creditors.

The IRS has been busy trying to shut down these scams. For the record, it doesn't work, and serious trouble awaits you if you try it.

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Spending has been cut to the bone!

January 29, 2010

Whenever the government wants more of your money, politicians say they can't possibly get by with less, because they have already cut spending as far as they possibly can. Then things like this come along:

John Frew, Gov. Chet Culver's chief of staff, said Thursday that he has been approached by Sioux City lawmakers who want to consider options for buying the 51-year-old John Morrell & Co. plant so the building can be torn down and the area redeveloped.

"We'd like to help them find the money to do that," Frew said in an interview with The Associated Press. "There could be a variety of ways to do it."

Yes, there could be a variety of ways to do that. For example, the people who own it right now just might want to figure out how to best get cash out of their investment, clean up the site, hire a real estate broker, and put it on the market. But if they think they can get a bunch of rubes from the government to use your money to take it off their hands for more than it's worth, they'll try that, too.

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Pushing the string with the jobs credit

January 29, 2010

The President will unveil his new proposal for a jobs credit today, reports Tax Analysts ($link). A reminder why this Carter-era retread won't work:

In a very nice story last week, Lou Wilin of the Findley Ohio Courier asked employers in his hard-hit state whether the credit would encourage to them to hire. Overwhelmingly, they said no: "People do not staff plants based on tax credits," said Jed Osborn, plant controller for Ball Corp. "You just do not hire people to stand around," Osborn said. "They have to have a reason to be there."

If the orders are there, the jobs will come. Without orders to fill, you can't hire anybody, even with a tax credit.

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They can vote. Why shouldn't they file tax returns?

January 29, 2010

TaxProf: California Man Pleads Guilty to Filing 250 Tax Returns for Dead People, Claiming $2m in Refunds.

More from Kay Bell and Peter Pappas.

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She was a secret IRS agent. So secret, they denied her existence.

January 29, 2010

Peter Pappas tells the tale of Sherry Lynn Vertoch, woman accused of running up a $55,000 hotel bill by impersonating an IRS agent. He also has helpful advice for aspiring IRS impersonators:

Ms. Vertoch would have made a more convincing IRS employee had she misplaced a tax return, given the wrong tax advice over the telephone or failed to answer taxpayer inquiries.

And if she couldn't do her own return, she could have impersonated the IRS Commissioner.

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Even if you don't have to file, you might want to.

January 29, 2010

You might be able to get some of Uncle Sam's fun bucks. Stacie Clifford Kitts explains.

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You're not too smart to be scammed

January 29, 2010

Brett Trout has a good roundup of current online scams at IowaBiz.com, along with some good advice for avoiding them:

The scams may be as simple as posing as someone in the victim's IT department and calling the receptionist to confirm his or her password works with the "new" system, or as complex as creating a fake multinational organization, complete with a pricey Web site and myriad references. Be wary of "spear phishing" scams buried within unsolicited emails. Never open attachments in an email from someone you do not know. Even if you do know the sender, scammers often "spoof" the name of the sender.

Also: real girls don't contact you out of nowhere dying for your love.

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You want to set up a charity for WHAT?

January 28, 2010

An Iowan's "charitable" dreams are dashed by the IRS -- my new post at Going Concern.

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Will Iowa's legislature take another shot at the deduction for federal taxes?

January 28, 2010

While Governor Culver's proposed budget doesn't propose to repeal Iowa's deduction for federal taxes paid, a key legislator has quietly put that issue back in play, reports GlobeGazette.com:

Although legislative leaders repeatedly have said they don’t foresee action on a plan advanced last year to eliminate a provision of Iowa tax code that allows Iowans to deduct their federal income tax payment when calculating their Iowa tax liability, House Ways and Means Committee Chairman Paul Shomshor, D-Council Bluffs, re-assigned the bill to a subcommittee Wednesday.

“We’re willing to take a look at any type of tax issue that moves Iowa forward,” Shomshor said.

The Democratic legislative leadership failed to force the bill through last year. It seems unlikely that anything has changed to make it any easier to pass this year, but hope springs eternal for tax-hikers.

The Governor does call for a $52.5 million haircut - about 10% - to Iowa's corporate welfare bill. Governor Culver remains committed to corporate welfare:

The governor said he would work with the Legislature to figure out how to save $52 million in revenues from tax credit programs. He did not say whether he favored getting rid of controversial incentives for film-makers or other less-in-demand incentives pinpointed for elimination by a panel of state agency representatives.

However, he recommends keeping credits for newer or still-struggling industries, Biodiesel Blended Fuel Tax Credit, E85 Gasoline Promotion Tax Credit, Ethanol Promotion Tax Credit, Renewable Energy Tax Credit, and the Wind Energy Production Tax Credit.

Because if the federal 50-cent to $1 per gallon biodiesel subsidy isn't enough to get these "struggling" businesses over the top, the state needs to throw even more money at them.

The whole concept of corporate welfare tax credits is discredited, except to politicians and those who cash in on the credits. Real economic growth occurs outside the corporate welfare system. The only way to motivate that sort of growth is to lower the rates and broaden the tax base -- something like the Tax Update Quick and Dirty Iowa Tax Reform. Instead, we'll see more haggling over who gets the welfare, and how much.

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Ore-gone

January 28, 2010

The voters in Oregon have voted to tax "the rich" to pay tribute to the state's public employee unions. They raised the top individual rate to 11%; as Oregon does not permit a deduction for federal taxes like Iowa does, the 11% rate is equivalent to a 15.98% rate in Iowa. Iowa's top rate is currently 8.98%.

Those who look to tax "the rich" forget two important things:

- Most high-income taxpayers are that way because they own businesses whose income is "pass-through" income, taxed on their 1040s. In other words, they are increasing the tax on their businesses at a time of double-digit unemployment. That's just stupid.

- The "rich" are mobile. It will be very tempting for Oregonians to head north to Washington (0% top income tax rate) or down to Nevada (0%) income tax rate. Just because you want to soak "the rich" doesn't mean they have to sit there and get wet.

Tax Policy Blog has more.

UPDATE: "Eat the Rich"

UPDATE II: The TaxProf has a roundup.

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Splitting refunds: recipe for trouble?

January 28, 2010

Kay Bell points out that taxpayers who split their tax refunds among different accounts need to be very careful to double-check the account numbers on their direct deposit information:

Sure, your direct deposit could go astray even when you're having your refund sent to just one account. But the chances for transposed or incorrectly entered info is increased when you're entering multiple accounts.

...

With a paper check, if it doesn't show up, the IRS stops payment and reissues it. With a misdirected electronic payment, the bank and Uncle Sam can't just go poking into the account to which it was sent.

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A Des Moines man's refund was mis-directed to an H&R Block employee's bank account last year, and it was a major hassle for him to get it back. If the deposit goes to some deadbeat who spends it all, you're out of luck. So make darn sure that the account information for your refund is current and correct.

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We're goverment, we can do this, don't you try it.

January 28, 2010

A dazer from William Perez:

The state of New York is no longer mailing out Form 1099-G to report how much of a state income tax refund a person received. Not mailing out this document will save the state "approximately $700,000," according to an email notification sent by the Department of Taxation and Finance.

If a business stopped mailing 1099s, they could look forward to getting at least a $50 fine per form -- probably more, as it would be a "willful" violation. It's good to be king.

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Greeting!

January 27, 2010

Most accountants now practicing are unfamiliar with the thrill of getting a friendly letter from the Selective Service to launch a mandatory term of government employment. At least in the military draft, the letters were addressed individually. In contrast, the public accounting industry is being drafted wholesale by the IRS.

It was probably inevitable. Once FIN 48 began to require companies to analyze tax risks in their audited financial statements, it was only a matter of time before the IRS wanted some of that. IRS Commissioner Doug Shulman made it official yesterday:

Reporting uncertain tax positions would be required at the time a return is filed by certain business taxpayers: those who have both a financial statement prepared under FIN 48 or other similar accounting standards reflecting uncertain tax positions and assets over $10 million. Under the Announcement, these taxpayers would be required to annually disclose uncertain tax positions in the form of a concise description of those positions and the maximum amount of US income tax exposure if the taxpayer’s position is not sustained. By concise, we mean a few sentences that inform us of the nature of the issue, and not pages of factual description or legal analysis.

This, of course, means that when auditors require a reserve for a tax return position, they also are requiring a disclosure to the IRS – turning audit crews into Doug Shulman’s little platoons. As if auditors weren’t already popular enough.

Why now? Transparency!

The IRS is taking a major step towards transparency that I want to announce today related to changes we are proposing to reporting requirements regarding business taxpayers’ uncertain tax positions.

Transparency is a one-way mirror as far as the IRS is concerned. Tax Analysts, the non-profit tax policy organization, has been waging war forever to get the IRS to be a little transparent itself. Christopher Bergin reports on one skirmish:

So, Tax Analysts went back to the courts to ensure that FSAs would be released to the public, and again Tax Analysts won. But this time, when the issue got to Congress, lawmakers told the IRS: Look, stop playing hide the ball. Use whatever acronym you want for your secret administrative law, we’re calling it Chief Counsel Advice, and it all belongs to the public. Period!

But did the IRS fear the voice of Congress? Apparently not. Because no sooner was the Chief Counsel Advice law enacted in 2000 than the IRS came up with a new rule: All Chief Counsel Advice that takes less than two hours to prepare does not have to be disclosed to the public.

If “transparency” means more than “you show me yours, mine is none of your business,” the IRS will immediately release all of its currently-secret insider tax law, and maybe even hire an outside auditor to make sure that there are no secrets left untold. They’ll get around to it as soon as Commissioner Shulman finishes penciling out his 2009 1040.


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Now what?

January 27, 2010

The President's big first-term project, health care, looks about dead. The 10%+ unemployment rate seems impervious to stimulus. So what's a President to do?

Reheat the leftovers.

From Bush: Expect renewal of the enhanced Section 179 deduction ($250,000 limit) and bonus depreciation. Because that sure stopped the recession in its tracks.

From Clinton: targeted "middle class" tax credits:

The administration proposes to nearly double the Child Care Tax Credit for families making under $85,000 a year; with families earning up to $115,000 a year seeing at least some increase in their credit.

From Carter: a Targeted "new jobs" tax credit. It won't work and will invite abuse.

It's probably not a good sign when a President starting his second year in office is reaching back to the Carter administration for economic ideas. That sure worked out great.

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Cardinal's safety's return under review

January 27, 2010

Football season is over for the Arizona Cardinals, but a member of their secondary is just getting started in Tax Court. Russ Fox reports on Antrel Rolle's tax problems:

Underlying the Tax Court case is an audit that apparently didn’t turn out so well for Mr. Rolle. Mr. Rolle is a resident of somewhere. His tax return said Fair Oaks (a suburb of Sacramento). Or maybe it was a light industrial park in Granada Hills (a section of Los Angeles in the San Fernando Valley). He gave substantial donations to churches. One church’s address was in a copy shop maildrop…”We’re not even open on Sundays,” a worker joked to Forbes. Another church’s address is a dermatologists office. Mail sent to the address of his business in Chandler, Arizona (a suburb of Phoenix) is returned as “undeliverable;” that address apparently doesn’t exist.

I'm guessing the replay booth is likely to uphold the IRS call on the field.

The TaxProf has more.

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Catch an early Buzz

January 27, 2010

Robert D. Flach rounds up the tax blogs.

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It's Wednesday...

January 27, 2010

...but you can still catch "Tax Twitter Tuesday," a roundup of tax microblogging, at Kay Bell's place.

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State not dead

January 27, 2010

State 29 is back!

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Can we just tax our way out of deficits?

January 26, 2010

From TaxVox:

Can we fix our budget problem by raising income taxes alone? With deficits as far as the eye can see, Rosanne Altshuler, Katie Lim, and I presented a paper at last week’s TPC/USC budget conference that came up with a fairly straight-forward answer: No.

For the record, TaxVox is the blog of the Tax Policy Center, a joint policy venture of the Urban Institute and The Brookings Institution -- no right-wing Scaife/Koch-funded think tank (not that there'd be anything wrong with that).

What if Congress just raised taxes for high-income taxpayers? Their rates would go up more than 40 percent under current law and more than 150 percent under current policy. In other words, the top tax rate would return to the bad old days of 90 percent. Even if we go for the Administration’s more modest goals—start with current policy and aim for deficits averaging 3 percent of GDP—those top tax rates would have to more than double, taking the top rate over 75 percent.

But wait, there's more!

While analysts disagree on the magnitude of that income shift, they’d all acknowledge that cranking the top rate up to 90 percent would lead to a massive reduction in taxable income and hence a lot less additional revenue than we found. People facing those high tax rates might work less or hire smart accountants. Either way, reaching our 2 percent deficit goal would require even higher tax rates and would quite likely prove impossible.

In other words, if the government can't get spending under control, they will eventually run out of other people's money.

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Does every disaster require a new tax law?

January 26, 2010

TaxGrrrl is unimpressed with the retroactive deduction for contributions to Haiti disaster relief:

But I don’t think that changing the rules for Haiti make sense – anymore than they did for the tsunami. And not because Haiti isn’t important. I *get* that it is. But more because I think it sends a weird message about our tax policy. It says that today, we value those donations more than we value others.

Here’s some food for thought:

* 3.1 million people die of AIDS every year; 20,000 of those are in North America.
* This year, about 562,340 Americans are expected to die of cancer, at a rate of more than 1,500 people a day. Of particular interest to me since my grandmother died of breast cancer, an estimated 40,610 breast cancer deaths (40,170 women, 440 men) were expected in 2009.
* In 2008, an estimated 11,773 people died in drunk driving crashes.
* And an estimated 100,000 children in the US go to bed hungry on a typical day.

So, why aren’t we ramping up the donation rules for RED, Komen, MADD, or Feeding America? Are those causes just not dramatic enough?

Maybe we should make an "evergreen" disaster tax law that applies the retroactive Haiti relief to any disaster that takes up more than 6 minutes of each hour of cable news airtime each hour for 48 straight hours.

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Not buying our stuff should be a crime!

January 26, 2010

"Industry: Make all gas in Iowa contain ethanol"

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Lessons in client service, Minneapolis-style

January 26, 2010

Sometimes hiring a shady preparer brings unanticipated risks. Like death:

The problems started when a man identified as "P.M." in the criminal complaint prepared a fraudulent tax return for Nunn's girlfriend. The plan was for the pair to split the proceeds.

But apparently Nunn's girlfriend thought she didn't get her fair share. She told 21-year-old Nunn about it, and Nunn went for revenge: He and two other men paid a visit to P.M. at his girlfriend's home and tried to rob him. Nunn allegedly waved a .45-caliber pistol around and told everybody to "get on the floor as this was a robbery and to get on the floor and get out their money as they know what time it is," according to the complaint. P.M. grabbed the pistol from Nunn, and shot him dead.

What is the "fair share" of a fraudulent return anyway? Can you split the prison time? In any case, it looks like P.M. will not face jail time for his rather harsh client service:

Nunn's two accomplices, Curtis A.J. Harrell, 18 and Travis Jesse Koehn, 25, have been charged with felony attempted aggravated robbery. City Pages counted Nunn's death as the 7th murder in Minneapolis so far this year, but it appears that the killing will not be charged as that specific crime, since it was in self-defense.

It is likely that "P.M" will get in a lot more trouble with the IRS for the false return than for shooting the dissatisfied client's boyfriend.

Link: Criminal complaint

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Stix hix nix flix trix

January 26, 2010

Variety takes notice of the Iowa film credit scandal and the growing resistance among the states to further subsidizing Hollywood.

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Will Iowa re-couple with federal deductions?

January 25, 2010

The article says the issue of linking Iowa's income tax rules to the latest federal legislation is "complicated," but it's really pretty simple:

“We’re going through some really tough decisions in state government and additional things that cost big piles of money aren’t likely to happen,” said Senate Majority Leader Mike Gronstal, D-Council Bluffs.

In other words, the legislature is loath to give up any of your money, and it's just tough that it makes a mess of your tax return.

This year the Department of Revenue telling taxpayers to assume that Iowa won't couple to federal changes. Last year the Department made the mistake of assuming the Legislature would get it together, causing many taxpayers to file botched returns.

Some of the provisions that will require different numbers on federal and Iowa returns, absent coupling legislation:

- Bonus depreciation is not allowed for Iowa.
- The Iowa Section 179 deduction will be limited to $133,000; the federal limit is $250,000.
- Iowa won't allow the $250 "educator" deduction.
- College tuition deductions won't be available on the Iowa return.
- The optional sales tax deduction will not be available on Iowa returns.

The newly-enacted retroactive 2009 deduction for contributions made in 2010 for Haiti disaster relief will also be unavailable in Iowa unless the legislature acts.

Prediction: Iowa will at most couple with a few of the little items -- maybe including Haiti relief -- and none of the big ones, like depreciation or Section 179.

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Taking a break from the tour

January 25, 2010

Champions Tour stalwart Jim Thorpe will have to give up his tournament starts for awhile. He has been sentenced to a year and a day in jail on tax charges:

Thorpe, 60, a 13-time winner on the Champions Tour, pleaded guilty last September to two counts of failing to pay income taxes. He has agreed to pay all taxes, interest and penalties owed.

"I've definitely made some mistakes," he admitted. "It was my fault."

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Flickr image courtesy Keith Allison's photostream.

It's sad. Many men of a certain age would sell their souls for a carefree year on the senior golf tour -- and Mr. Thorpe, who had all that, instead will have to sit out in some dingy federal prison camp somewhere.

The Moral? You have to file your taxes, even when you have your own name on the bag.

Oops: I should note, The TaxProf has a roundup.

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Iowa: poker hotbed?

January 25, 2010

They're talking about it, reports gambling tax maven Russ Fox. It's not for the love of the game:

I’ll translate that: We’re looking at a way of increasing tax revenues. Since I can’t add video poker terminals (that was voted down by the Iowa legislature) this looks like a way I can increase revenues so I can spend more money.

That's about right.

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How many Iowa legislators have this problem?

January 25, 2010

David Brunori reports:

Georgia newspapers reported yesterday that State Revenue Commissioner Bart Graham sent notices to at least a dozen state legislators who owe back taxes for 2008.

With 150 of them, it would be almost shocking if there weren't a few Iowa legislators with tax problems. They're usually better at dishing it out than at taking it.

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Haiti retroactive deduction bill signed

January 25, 2010

The President has signed HR 4462, the bill allowing taxpayers to deduct 2010 contributions for Haiti disaster relief on 2009 returns. The retroactive deduction is only available for cash donations. More coverage from Kay Bell, William Perez, Stacie Clifford Kitts, and Chad Bordeaux.

Oh, and don't count on it for Iowa. While Iowa might "couple" with this, considering how the state is a bit short these days, they just might not.

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Unanswered FAQ: why did they hire H&R Block CEO to write them?

January 22, 2010

The IRS has issued a FAQ on their proposed preparer regs. This bit is interesting:

Will the testing be done by the same firm that administers the enrolled agent exam? Or will IRS be doing the testing?

The testing likely will be done by an external vendor(s). The vendor(s) is unknown at this time.

Maybe H&R Block will find a good off-season business opportunity.

Will the recommendations apply to individuals who only prepare payroll or other non-1040 series returns?

All paid signing tax return preparers will be required to register. If the preparer is not an attorney, certified public accountant, or enrolled agent, the preparer will need to satisfy the competency test and continuing education requirements. The preparer will need to pass the complex test if they prepare business returns.

Welcome to hell, all of you private payroll service operators. Congratulations, ADT.

What is the required percentage to pass the competency test?

This has not been determined. Stay tuned to the IRS.gov Tax Professionals page for information on this issue.

Well above that required of Congresscritters, Treasury Secretaries and IRS Commissioners.

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Whistleblower must pay tax on reward; attorney fees are miscellaneous deductions.

January 22, 2010

A Lockheed Martin analyst blew the whistle on alleged procurement fraud by his employer on government contracts. The company ended up settling in 2003 with a $37.9 million payment to the government. The whistleblower received an $8.75 million cut as a "qui tam" payment (I think that means "plaid hat" in Scottish). 40% of the $8.75 million went to the whistleblower's lawyers.

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A Chicago tam-o-shanter, Creative Commons Flickr image courtesy TheeErin.

While the whistleblower got lawyers involved, he apparently was too thrifty to pay a tax advisor to help him with that small unusual income item, as the Tax Court explains:

On October 26, 2004, [late, even for an extended return - ed.] petitioner filed a Form 1040, U.S. Individual Income Tax Return, for his 2003 taxable year (return). Petitioner prepared the return without consulting a tax professional. Petitioner included the $5.25 million net proceeds of the qui tam payment on line 21 of his return as other income. However, the return omitted the $5.25 million net proceeds of the qui tam payment from the calculation of taxable income on line 40. The return showed a resulting taxable income of $793. Petitioner attached to the return Form 8275, Disclosure Statement, in which he argued that the $3.5 million attorney's fee payment had been held not to be taxable income by the U.S. Court of Appeals for the Eleventh Circuit. On the Form 8275, petitioner failed to include a citation of an opinion of the Eleventh Circuit, or of any Court of Appeals, standing for that proposition. Additionally, petitioner failed to identify on the Form 8275 any authority for excluding from his taxable income the $5.25 million net proceeds of the qui tam payment.

Nothing good happened from this point on in the whistleblower's tax life. The Tax Court yesterday ruled:

- The entire $8.75 million was includible in his taxable income.
- The $3.5 million lawyer fee was only deductible as a miscellaneous itemized deduction, which means not a deduction at all in computing alternative minimum tax.
- He was subject to accuracy-related penalties of $608,800 and late filing penalties of $151,955.50.

How much does that leave our whistleblower? He had $5.25 million after the attorney fees. The IRS assessed $3,044,000 in tax. After tax, penalties, and lawyer fees, $1,445,245 is left -- not counting the fees for the lawyers he used in Tax Court. Now $1.4 million is better than a poke in the eye, but at the very least he could have saved himself $750,000+ in penalties had he been advised better.

The Moral? If you are going to get a windfall, get the tax people involved early, not after you've filed a late and botched return.

Cite: Campbell, 134 TC No. 3

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Tax Preparers, Bootleggers and Baptists

January 22, 2010

From Lynne Kiesling at the Knowledge Problem:

-Don Boudreaux points out that the proposed new regulation of income tax preparers is completely and utterly preposterous. He characterizes it as yet another brick in the Wall of the Nanny State; I would add that the parties applying the mortar around that brick are precisely those who have substantial economic benefit from such regulation — the already credibly qualified income tax preparers. Bootleggers and Baptists, anyone? As Don points out, it’s a ludicrous myopia of political elites to believe that their “enlightened” hand of regulation would do any better job than the very real, very personal, very distributed and decentralized incentives that every.single.individual faces to minimize the taxes s/he pays while still abiding by the law.

Here the IRS takes on the role of the Baptists. You know who the bootleggers are.

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How to attract filmmakers without bribes

January 22, 2010

Have a good natural location and a good business tax environment. It works for Nevada. Still, the Des Moines Register today once again publishes credulous propaganda on behalf of film subsidies, in spite of the disastrous record of the Iowa Film Credits.

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Roberts proposes repeal of Iowa Corporate Tax

January 22, 2010

Rod Roberts (R, Carroll), a candidate for Iowa Governor, has introduced a bill to repeal Iowa's futile corporation income tax. It's a good start, but more is required.

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Bill allowing deduction of 2010 Haiti contributions in 2009 passes

January 22, 2010

The Senate has passed HR 4462, the bill allowing taxpayers to deduct 2010 cash contributions for Haiti relief on 2009 returns. The president will sign it quickly. Kay Bell has details.

Remember, you can deduct your 2010 Haiti gifts on either your 2009 or 2010 returns, but not both. And Iowa is unlikely to conform, so if you deduct a 2010 Haiti gift on your 2009 federal 1040, expect to wait until 2010 for your Iowa deduction.

Russ Fox has more.

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Farmers can always go back five

January 22, 2010

While a special provision enables taxpayers to carry back 2008 or 2009 net operating losses back three, four or five years, instead of the normal two, qualifiying farmers can always go back five years, as Paul Neiffer explains.

The five-year-instead-of-two business carryback rule can affect farmers. The normal five-year farm NOL carryback doesn't give you the option of going back only, say, four years. You might want to do that if you are in a 15% bracket in the fifth year, but in the 35% bracket four years back. Such farmers can elect to not be treated as farmers for loss carryback purposes, which would enable them to use the regular business NOL rules to go back only three or four years if they so choose.

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Buy insurance from an insurance guy; buy your tax advice from a tax advisor

January 21, 2010

A Peoria, Illinois business appears to have learned a hard lesson: don't take tax advice from somebody who gets a commission as a result.

Mr. Johnson got some unorthodox advice from an insurance salesman, according to an Illinois federal judge:

Craig Johnson is the owner of Galesburg Electric/Industrial Supply, Inc., a supplier of electrical products. In 1996, Gerald Koenning and Lou Delpierre, the director and owner, respectively, of Employers Benefits, Inc., approached Johnson with the suggestion that he unionize the employees of Galesburg Electric for the purpose of providing life insurance to the employees (including himself) under an arrangement that would yield favorable tax consequences. Koenning and Delpierre apparently told Johnson that establishing a union as a vehicle through which to procure life insurance for the employees -- specifically, by way of a death benefits employee welfare plan -- would ensure that the insurance premium payments would be tax deductible. Specifically, Koenning and Delpierre promoted a death benefits plan that, they claimed, was organized as a tax-exempt voluntary employees' benefit association (VEBA) under 26 U.S.C. § 501(c)(9). Additionally, Koenning and Delpierre either supplied to Johnson or arranged for him to receive marketing materials pertaining to the death benefits plan. These materials were produced by the "Master Contract Group" (a multi-employer association formed for purposes of collective bargaining), and the documents purportedly paralleled Koenning's and Delpierre's representations.

The judge noted one little problem with the plan:

The specific type of arrangement to which Johnson and Galesburg Electric had subscribed was specifically disavowed by the IRS in a notice published in April 2001. See IRS Notice 2003-24 (April 11, 2003). As such, the IRS did not allow the income tax deductions...

Even so, the judge ruled that the taxpayer couldn't sue the insurance guys in federal court under ERISA. There may be state law remedies, but none of this would be necessary if the taxpayer had gone to a competent and disinterested party to check out the sales claims.

The Moral: life insurance premiums are rarely deductible, no matter how you slice them. Honest and capable insurance brokers (the vast majority of them) won't tell you otherwise. If a broker promises you a tax deduction life premiums, talk to a real tax pro before you pay a dime.

Cite: Craig M. Johnson et al. v. Security Mutual Life Insurance Co. of New York et al.; No. 1:08-cv-01267 (link not yet available)

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Preparer shopping?

January 21, 2010

New Jersey tax pro Robert D Flach has some tips. So do we.

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Deduct it now, deduct it later

January 21, 2010

My overseer at the Going Concern blog airily dismisses our, er, griping about the unwisdom of a special tax deduction for Haiti relief. Peter Pappas points out that the proposal, which would permit deduction on 2009 returns for contributions made this year, practically begs for double-dipping:

In other words, taxpayers will take their Haiti charitable contributions twice: Once on their 2009 tax return under the new law and then again on their 2010 tax returns because that’s the year in which the contribution was made.

And auditors may not catch this double-dipping because taxpayers will be able to present the same proof for both tax years.

But it's tax noncompliance for a good cause, and while it probably accomplishes nothing, it gives the politicians a chance to issue more press releases, so it's just wonderful.

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Brokerage accounts gone wild!

January 21, 2010

The IRS gets to keep its jeopardy assessment against "Girls Gone Wild" impresario Joe Frances. Mr. Francis recently copped a plea to tax charges, but apparently the IRS doesn't fully trust him to pay up his back taxes. Kay Bell has the scoop.

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Ice Carnival!

January 20, 2010

It's rainy. It's cold. It's icy. Nobody will blame you for staying in.

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So light a fire, warm up the cocoa, and curl up with the new Carnival of Taxes at Kay Bell's place. What better way to spend an icy day than with a roundup of tax posts from around the blog world?

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IRS issues Applicable Federal Rates (AFR) for February 2010

January 20, 2010

The IRS has issued (Rev. Rul. 2010-06) the minimum required interest rates for loans made in February 2010:


-Short Term (demand loans and loans with terms of up to 3 years): 0.72%

-Mid-Term (loans from 3-9 years): 2.82%

-Long-Term (over 9 years): 4.44%

The Long-term tax-exempt rate for Sec. 382 ownership changes during February 2010 is 4.14%

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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Haiti earthquake rattles the tax law

January 20, 2010

When something bad happens, politicians reflexively reach for the tax code. They should put it down and back away slowly, as Howard Gleckman explains at TaxVox:

In a rare bit of bipartisanship, Democrats and Republicans on the House Ways & Means Committee have introduced legislation to allow people who contribute to Haiti relief in 2010 to take a tax deduction against last year’s taxes. Well-intentioned as it may be, the measure is wrong-headed and likely to create more problems than it solves.

...

Why does Congress want to encourage people to give to Haiti as opposed to other equally important causes? I’m not downplaying the Haitian catastrophe in any way. But do Haitians need more help than, say, 2 million displaced Somalis? Is a homeless family in Port au Prince more homeless than a family in Congo, where a civil war has killed five million and left another 2.5 million in camps? And are we sure that Haiti-related charities (among which the bill does not distinguish) are all worthy of this extra tax incentive--modest as it may be.

By all means help Haiti. It needs your assistance. But don’t be surprised if congressional micromanagement of your good intentions turns out to be much less helpful than the bill’s sponsors would like.

As bad as Haiti is, it's not the first disaster ever, and one more change to the tax law isn't going to solve that sad country's problems. Of course, the proposed changes are more about politicians making a show of concern than actually accomplishing anything.

UPDATE: Text of HR 4462 as passed by the House is here. In response to a comment, it does nothing to the existing rules for property contributions, including the requirement for a qualified appraisal to claim a fair-market value deduction for a property donation over $5,000.

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That National Treasure might come in handy

January 20, 2010

Actor Nicolas Cage owes a lot of taxes. Peter Pappas, TaxGrrrl and Dan Meyer are all over it.

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Brownout

January 20, 2010

The election of a commoner to the Kennedy dynastic Senate seat changes the tax policy game, especially for health care issues. Martin Sullivan comments at Tax.com:

The health care bill is a tax bill. If the Senate bill were adopted the tax on high-end insurance plans (without the concessions for union members adopted by House negotiators) would become the law of the land. A surtax on high income households included in the original House bill is now out of the question. If health care gets melded into the reconciliation process, the modified House version of the excise tax probably would be the starting point.

Looking beyond health care, the conventional wisdom is that the election of Scott Brown throws the whole Obama agenda into jeopardy. This may be true.

When a Republican can replace Ted Kennedy, it has to give red-state Democrats pause.

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Break the Ice with Radio Joe

January 20, 2010

The podcast interview of my by Natasha Altamirano of the Tax Foundation is now up. We discuss the Iowa Film Credit fiasco. You can hear for yourself why I never pursued a radio career. With the town shut down for an ice storm, it will make the time just fly by!

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Congressional channel-stuffing

January 19, 2010

Budding auditors learn early about the accounting fraud technique "channel stuffing." It happens when manufacturers ship stuff to custormers that they don't really want and expect to take back; the purpose is to artificially inflate earnings, letting later quarters take care of themselves, hopefully after the executive has taken a bonus and left town. Executives caught at this can expect jail time and a brutal verbal beatdown by self-righteous Congresscritters.

But the Enron boys were pikers compared to our Congress. In 2009 they enacted a bill that "raised revenue" by making big corporations pay 133.25% of their estimated taxes otherwise due in the third calendar quarter of 2014. This will reduce the required 4th quarter payment by the same amount, but as the federal fiscal year ends in September, this one-month boost in income is considered additional fiscal 2014 revenue -- channel stuffing.

They stuffed the channel a bit more at the end of 2009 when Predient Obama signed HR 4284 "To extend the Generalized System of Preferences and the Andean Trade Preference Act, and for other purposes." This increases the 2014 3rd quarter channel stuffing rate to 134.75% of the normally-required estimated tax, providing $806 million in "new" revenues for fiscal 2014.

So next time Congress gets self-righteous about accounting abuse, be assured that they know what they're talking about.

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Code-Busted

January 19, 2010

A couple that joined a tax-protest outfit called CodeBusters was extradited from Costa Rica Sunday on tax evasion charges. Russ Fox has details.

Hint: if a tax plan requires you to give your money to your parents, hide it offshore, and then requires you to flee the country, there's a good chance that it doesn't actually work.

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Branstad: smokestack chaser?

January 19, 2010

Kathie Obradovich today discusses the history of once-and-maybe-future Governor Branstad's "economic development" activities.

Here's a summary of Branstad tax policy: Iowa's corporate income tax rate was 12% when he took office, and 12% - highest in the nation - when he left office 16 years later. The individual rate was 13% when he took office and 8.98% when he left office. Other than these rate changes, Iowa's tax rules changed little. His term saw new "targeted" incentives and taxation of Iowa businesses to lure and subsidize their competitors -- notably the IPSCO Steel chase. He made no serious effort to move from a high-tax system with lots of loopholes to a low-rate, broad based, simple system. It's worse now than when he left, but it got worse while he was in office, too.

So far only one candidate, Rod Roberts, seems serious about fixing Iowa's broken business climate, but nostalgia, a weakened Democratic incumbent, and gay marriage seem to be driving the Republican primary campaign.

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What a phishing scam e-mail looks like

January 18, 2010

The mother of one of my colleagues received this email the other day:

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Click to enlarge image

There are a number of obvious things wrong with the email, including an exclamation point (not typically seen in IRS correspondence) and a copyright statement at the bottom, which would be really weird for an IRS notice.

The most obvious problem, though, is that the IRS never issues notices to taxpayers by e-mail. If you have received an "IRS notice" by e-mail, it's bogus. Do not open it, and especially do not click on any links in the e-mail.


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Tax Foundation: Film Credits Fail

January 18, 2010

The Tax Foundation has a new study up on how worthless film credits are. As Iowa has perhaps the biggest such credit, it must be the most worthless.

Tax Policy Blog summarizes:

The key findings:

* Forty-four states now offer significant movie production incentives (MPIs), up from five states in 2002, and twenty-eight states offer film tax credits.

* In the face of state budget pressures and preposterously generous incentives in Louisiana and Michigan, states may curtail or even terminate their MPI programs. Kansas and Iowa have suspended theirs, Kansas for two years to save revenue and Iowa briefly to investigate corruption.

* MPIs have often escaped routine oversight about benefits, costs and activities.

* Spurious research is common in campaigns for film tax credits, often featuring dramatic job creation claims. A recent study concluded that Pennsylvania's film tax credit produces net benefits of $4.5 million by assuming that any business interacting with the film industry would not exist but for the credit. MPIs create mostly temporary positions with limited options for upward mobility.

* The MPI experience demonstrates that a politically connected industry can grow if the state greatly reduces its taxes, but states should have a tax system that operates as a welcome mat to all industries, not just those politicians have picked.

Disclosure: The Tax Foundation report includes a writeup I provided on the Iowa film credit fiasco.

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Live tax chat with legislators today

January 18, 2010

The Des Moines Register will have a live online chat today at noon with Sen. Joe Bolkom (D-Iowa City) and Rep. Jeff Kaufmann (R-Wilton):

Two lawmakers who are key players in determining Iowa tax policy will discuss tax issues in a live chat from noon to 12:45 p.m. tonday. A prime topic: recommendations to restrict or end several tax credit programs.

This could be a good opportunity to ask them why they should take money from your business for tax credits to lure and subsidize your competitors.

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New year, new Cavalcade

January 18, 2010

A fresh Cavalcade of Risk is up at Colorado Health Insurance Insider.

IMG_0130 by you.

Among the many good posts is one by the always-worth-reading Hank Stern explaining variable annuities.

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Gig 1099s

January 18, 2010

TaxGrrrl helps a musician who gets a 1099 for money that had to be split with the rest of the band.

As the father of an aspiring bassist, I hope he has this sort of problem a lot, from getting lots of work.

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Want to help Haiti? Make sure your money ends up where it should

January 18, 2010

William Perez rounds up some tips for safe giving.

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Estate tax may be gone for now, but its ghost lingers

January 18, 2010

Roger McEowen points out the estate tax hasn't really gone away for everyone:

But, in one sense, the estate tax is not completely gone for 2010. Even though the estate tax is repealed for deaths in 2010, those estates that have elected special use valuation, the qualified family-owned business deduction, or have elected to pay the estate tax in installments from pre-2010 deaths, the recapture rules will continue to apply in 2010 through the end of the applicable recapture period.

He also looks at what't next for the estate tax.

PS: I've removed the weird apostrophe in the headline "its." I hate those things.

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Me: What if drinking beer and eating chocolate helped you lose weight and keep fit?

January 18, 2010

Doak: What if higher taxes meant nearly full employment?

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But I'm sure he only has the taxpayer's best interest in mind

January 15, 2010

When some commenters said that the new tax preparer regulations favored big outfits like H&R Block, others saw no evidence of a "conspiracy" against small preparers. If there is no conspiracy, there's at least a conspiracy to make it look like a conspiracy:

Mark Ernst, in December 2007, was chief executive officer of H&R Block, the nation's largest tax-preparation company. Thirteen months later, once President Obama took office, Ernst was named a deputy commissioner at the Internal Revenue Service, where he would spend his first year drafting new regulations for tax preparers -- regulations that H&R Block welcomes and market analysts say will benefit the company.

The mom-and-pop tax prep shops will find that reassuring.

Via Best of the Web.

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A batter who hits .320 is doing pretty well!

January 15, 2010

The Government Accountability Office reports that the recent "research project" exams found errors in 68% of S corporation returns examined. That compares to a 70% error rate in sole proprietorship returns. I didn't realize that 32% of 1120-S filings were "no activity" returns.

The IRS counted as "wrong" any return with an adjustment, no matter how minor. An experienced practitioner could make a change in just about any S corporation return with any substance, so it's not at all surprising. There are a lot of moving parts in a business return, and a lot of complicated tax provisions that apply. Consider the biggest "errors" in the returns:

By median misreported amount, noncompliance was the highest in not paying the correct wage compensation to S corporation shareholders; this noncompliance was much greater than the second highest median misreported amount—distributions to S corporation shareholders.

Begging the question: what is the "correct wage compensation" for an S corporation shareholder? The IRS wants S corporation compensation to be high to maximize FICA and Medicare tax receipts. In contrast, they want C corporation compensation to be low to maximize corporation taxable income and non-dedutible shareholder compensation. As the report admits:

Generally, an officer of an S corporation is considered to be an employee of the corporation for federal employment tax purposes, and thus employment taxes must be paid on an estimate of “reasonable” or adequate shareholder wage compensation. However, the difficulty and subjectivity in determining what constitutes an adequate wage enables some S corporations to pay inadequate wage compensation for the labor provided and compensate their officers through higher amounts of distributions, payments of personal expenses, and/or loans.

But let's say your S corporation is losing money. Should a 100% shareholder pay himself a "reasonable" salary just to ship some FICA money to the IRS? There would be no Self-employment tax liabilty for a similar Schedule C business, so that seems just stupid -- but the IRS is raising the issue on exams. And how can an S corporation owner know what salary is "reasonable" anyway? The owners and their preparers don't have some database they can plug into for, say, a "reasonable" salary for an owner of a struggling manufacturer in rural Iowa.

The "distribution" errors are directly the fault of IRS and Congress. The S corporation returns are poorly designed for determining the tax status of distributions, and the rules can be hard to understand. Tax prep software companies often do a nice job preparing off-to-the-side schedules of distribution taxability and shareholder basis. If the IRS wants to improve compliance there, they should redesign their K-1s based on what the software companies do.

Hat Tip: TaxProf Blog.

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Assigning Responsibility

January 15, 2010

The White House proposes a "Financial Crisis Responsibility Fee." It would be a great idea if they really assigned responsibility all around. To live up to the name, it would have to apply to more than just the big banks hit by the proposal.

It would impose a large fee on Barney Frank (D-Fannie Mae), who wanted Fannie Mae and Freddie Mac to "roll the dice" to subsidize more shaky home loans; maybe he would get a surcharge for doing so while sleeping with one of their top executives.

It would apply to Chris Dodd (D-Countrywide), who called Fannie and Freddie "one of the great success stories of all time," not long before they failed.

Of course, many of the other politicians who supported Fannie and Freddie to the bitter end, and beyond (and still do) would have to pay up.

Ben Bernanke and Alan Greenspan would be likely to pony up such a "responsibility fee." Certainly the political big fixers who got cushy jobs at Fannie and Freddie, like Franklin Raines and Jamie Gorelick, would contribute some of their multi-million dollar bonuses to cover their share of the "responsibility fee." And what about all the happy borrowers who bought more house than they could afford because they thought they could always flip them to someone else? And the generations of politicians who have voted to subsidize home ownership with tax breaks?

We could do this all day. But the White House just wants to assign "responsibility" to a few banks -- a shame, when there's so much responsibility to go around.

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For a daily tax tip...

January 15, 2010

...go to TheStreet.com for a daily tax tip from New Jersey preparer Robert D. Flach. I like yesterday's contributions, "Finances Come First," which makes the sensible point that it is better to have a dollar in cash than a one dollar tax deduction.

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Fourth quarter estimated tax payments are due today

January 15, 2010

William Perez explains. Paul Neiffer explains how farmers can pass on estimated tax payments if they file their return and pay their tax by March 1.

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Tax incentives to bring in high-tech jobs don't work

January 14, 2010

That's the conclusion of Good Jobs First, a left-side public policy group. The study, co-authored by University of Iowa professor Peter Fisher, draws this conclusion:

High-tech job creation (or loss) is overwhelmingly driven by events within the state—not by interstate relocations.

An analysis enabled by a relatively new proprietary data set, the National Establishment Time Series (NETS), finds that Pennsylvania’s interstate in-migration (or out-migration) of high-tech jobs is dwarfed (by a factor of 28 over 16 years) by the impact of business-establishment births, deaths, expansions and contractions. Whether positive or negative, the net movement of high-tech firms and jobs across the state’s borders each year is almost negligible compared to the impact of instate activity. Long term, interstate movements have been nearly a wash: over the same period, the state experienced a very small net in-migration of workplaces and a very small net out-migration of jobs.

While businesses that shake down states for subsidies get a lot of press, as do the politicians who enable them, the real economic development occurs outside of the corporate welfare system. This tends to vindicate the Tax Foundation model of few or no subsidies, simple and broad-based taxes, and lower rates. It also implies that Iowa's system of 30-odd "targeted" subsidies should be scrapped and replaced by something like The Tax Update Quick and Dirty Iowa Tax Plan.

Via the TaxProf. David Brunori has more at Tax.com.

Links:

Summary
Full Study

Related: Report: ax the film credit, cap others.


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Back before preparer regulation

January 14, 2010

You wouldn't believe the things some practitioners were accused of back in the old days. Check out my new post on Going Concern.

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IRS answers on homebuyer credit

January 14, 2010

IRS practitioner liason Kristy Maitre has sent an e-mail answering questions on the First Time Homebuyer Credit. Here's one anwer:

Q. If a person purchases a home from a related person and pays Full Market Value, do they qualify for the FTHBC? If they receive the property as a result of a gift or inheritance, they would not qualify?

A. Who cannot take the credit?

If any of the following describe you, you cannot take the credit, even if you buy a new home.

o Your income exceeds the phase-out range.

o You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.

o You do not use the home as your principal residence.

o You are a nonresident alien.

(NOTE – It is the relationship that disqualifies them. One of the questions on the Form 5405 is “Did you purchase the home from a related party? If yes, stop, You cannot claim the credit.” Also a gift/inheritance is not a purchase. And, when they fill out the form, under purchase price they would enter zero (it doesn’t say FMV) and no credit would be allowed.)

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Why do taxpayers only win 14% of tax cases in court?

January 14, 2010

The Legal Times blog reports that the IRS wins 86% of cases that end up in court. Is it because the IRS has home field advantage? That might be part of it, but the main reason is that so many taxpayers litigate dumb cases.

People who have already lost their case try to fight it again in collection, making "collection due process" cases the most litigated issue. People litigate tax protest cases, thinking that they have figured out a way to win where thousands before have lost.

If you have a real tax issue, your odds are much better. If you want to argue that wages aren't income, your odds are much worse.

Via the TaxProf. Peter Pappas has more.

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Whither the estate tax?

January 14, 2010

Joel Schoenmeyer lays out the possibilities:

#1: No action by Congress (no federal estate tax in 2010, but federal estate tax automatically comes back with a $1 million exemption in 2011 and thereafter);

#2: Prospective action by Congress (federal estate tax re-enacted for 2011 and thereafter -- and maybe for the rest of 2010 as well); and

#3: Retroactive action by Congress (so federal estate tax applies in all cases, even for 2010 -- obviously there's the retroactivity problem here).

If I had to guess, I'd say that #2 seems like the best possibility (maybe I should, but I'm not even including total repeal as a possibility). But even if that's the case, we have no idea what the re-enacted federal estate tax will look like. Will the exemption amount be $3.5 million? Or higher? Or lower?

I expect some version of #3, but not to the point where I would bet much on it.

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Some problems aren't really tax problems

January 14, 2010

'Kristen' has a question for an IRS consultant at OregonLive.com:

I need to know if I can claim my boyfriend as a dependent on my 2009 taxes. He has been unemployed with no income for whole, I pay for everything for him, and we have lived together.

I did see the answer that a boyfriend could be claimed as a not a qualifying child - a child cannot be your qualifying child or the qualifying child of anyone else, but is there a age limit? He turned 25 on December 20th, 09.

I'll take a shot at the answer, Kristen. No, you can't take the deduction. You may qualify, if he is not claimable by anyone else. But that's the least of your problems. When you have a grown man mooching off you while you go out and bring home the bacon every day, it's time to examine more than your 1040.

UPDATE: That's what I get for being a smart-aleck. You can be a "qualifying relative" without being related under IRC 152(d)(2)(H):

An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703 , of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household.

That means Kristen just may get to claim her boyfriend, at least on her tax return. Thanks to the commenters for setting me straight.

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Cattle rustling, the accountant way.

January 13, 2010

A Minnesotan accused of diverting hundreds of thousands of dollars from a co-op through phony cattle sales has been sentenced on tax charges:

For years, Barry May made up fake sales invoices and processed more than 2,200 fraudulent transactions while his wife cooked the books to cover the crimes, authorities said.

Prosecutors used tax laws to charge the Mays with under-reporting their gross income by at least $1.03 million from 2001 to 2005.

The couple apparently blew the ill-gotten gains at casinos, though some of it may have made it to the dinner table:

Authorities followed paper trails but never were able to prove that actual cattle were stolen and diverted by the Mays to their calf farm in Cannon Falls.

But for Jeff Reed, CEO of the cooperative, there isn't much doubt. "We believe there certainly were, yes," Reed said Tuesday.

Accounting skills open the door to many careers. Add cattle rustler to the list.

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Defined benefit plans are underwater. Let's do more of them!

January 13, 2010

Strange news:

(Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Of course, an annuity is only a "steady payment stream" if there are assets available to pay them. The massive actuarial shortfalls of private and (especially) government pension plans show that there is nothing "guaranteed" about defined benefit plans. There are no guaranteed plan benefits; there are only plan assets. If the "guaranteed" benefits exhaust plan assets, there suddenly is no more guarantee.

The Seeking Alpha Blog sees this as a ploy to force retirement funds to invest in Treasuries:

As described in this Bloomberg article, the U.S. Department of the Treasury is now officially looking at ways to force a portion of every 401k/IRA account---or some other as-yet-nonexistent, government-mandated employee benefit account---into "fixed payment annuities", which in plain English, means that most of the money would be channeled into long-term Treasury bonds.

Officially this is all about "retirement security" (sounds nice), but it would also constitute a de facto seizure of private assets in order to fund government deficits at negligible interest rates---a stealthier version of what recently happened in Argentina.

That seems far-fetched, but so did government ownership of General Motors not long ago.

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Why I don't have accountants do my root canals

January 13, 2010

Two Ohio dentists decided to help each other with their tax work. The results aren't impressive.

Two area dentists facing charges of tax fraud were arrested Monday after they did not show up for their jury trial that was to begin Monday in the U.S. District Court in Cincinnati.

Dr. Bruce A. Mrusek of Maineville and Dr. Bradley C. Brennecke of Pleasant Plain were arrested Monday by U.S. Marshals and their bond was rescinded, according to Craig Casserly, public information officer for the Criminal Division of the Internal Revenue Service (IRS).

They are accused of making up phony documents -- I'm guessing "bills of exchange" like those Wesley Snipes used -- to "pay" their taxes.

Mrusek and Brennecke allegedly helped each other create and mail fraudulent tax returns and documents.

Mrusek is also charged with filing false business tax returns. His practice is Wilmington Dental Management Services at 260 W. Locust St., Wilmington. According to the indictment, Mrusek’s fake payments to the IRS and/or the U.S. Treasury, total about $19.2 billion.

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The Moral? Don't use dentists for tax work unless you have your CPA do your fillings.

Russ Fox has more.


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The strange post-estate tax world

January 13, 2010

Now that the Estate Tax has expired for this year, to spring to life next January 1 if not revived retroactively, a lot of "two-trust" wills could have have strange results for taxpayers who die this year -- such as leaving a spouse with nothing. Joel Schoenmeyer explains.


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Choose wisely!

January 12, 2010

The IRS has issued its annual advice on choosing a tax preparer:

1. Check the person’s qualifications Ask 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.

2. Check on the preparer’s history Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys.

3. Find out about their service fees Avoid preparers that base their fee on a percentage of the amount of your refund or those who claim they can obtain larger refunds than other preparers.

4. Make sure the tax preparer is accessible Make sure you will be able to contact the tax preparer after the return has been filed, even after April 15, in case questions arise.

5. Provide all records and receipts needed to prepare your return Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.

6. Never sign a blank return Avoid tax preparers that ask you to sign a blank tax form.

7. Review the entire return before signing it Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

8. Make sure the preparer signs the form A paid preparer must sign the return as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

While useful, this advice is incomplete, so as we do annually, we'd like to make a few additional suggestions.

Check a preparers professional affiliations. Watch out for preparers whose members provide them with continuing surveillance and hold them to a code of silence.

Check the Preparer's Pulse. Zombie preparers are nothing but trouble.

Check if the preparer has a history. You don't want a preparer to love you and leave you.

Find out about their service expectations. Beware preparers who expect you to shovel their driveway or wash their car.

Make sure the preparer is accessable outside of prison visiting hours. Self-explanatory.

Never sign a blank return in crayon. This is an audit "red flag"

Review the entire electronic return file carefully. Some jokesters like to put in naughty pictures to see if the IRS will notice.

Make sure the preparer signs his own name. His real name is unlikely to be, say, "Elvis Presley," "Abraham Lincoln" or "Barack Obama."

Be careful out there!

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37 years for Ed Brown

January 12, 2010

Ed Brown, the tax protester who held federal marshals at bay for months while holed up in his New Hampshire house, yesterday received a 37-year prison sentence on weapons charges arising from the holdout. This will be served after he finishes his 63-month tax sentence. Mr. Brown can now expect to celebrate his 100th birthday behind bars.

The sentencing judge ruled that he was free of mental illness and competent to participate in court proceedings. Nothing crazy about this:

During his pre-sentencing remarks to the court, Brown launched into a 45-minute diatribe against the "Freemason, Jesuit, Zionist" conspiracy that he said have formed enemy cells that are destroying basic constitutional principles upon which the nation was founded.

It seems not to have persuaded the judge, whose status as a Freemason, Jesuit or Zionist is undisclosed.

The Moral? Armed holdouts are poor tax planning.

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A new tax on bank customers?

January 12, 2010

TaxGrrrl and Peter Pappas report that the IRS is considering a new tax on banks. It's not clear what it will be, but the Wall Street Journal says:

One option under consideration involves placing a fee on a bank's liabilities, a number that theoretically represents the amount of risk a bank takes on, according to officials familiar with the matter. That approach would also have the effect of tamping down banks' risky behavior, another administration goal. Another option would be to target bank profits, these people said.

Bank "liabilities" is another way of saying "customer deposits." That means a tax on you. TaxGrrrl gets it right:

I can’t imagine that this looked all that good on paper… Apparently, in an effort to recover the TARP money from banks and other groups that the White House is anticipating won’t actually be paid back to taxpayers, they’re going to tax the banks, who will likely pass along the tax to taxpayers – to make sure that taxpayers get paid back.

Hmm. The banking industry is tottering, so we'd better tax it so that we can bail it out!

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Why regulating tax preparers will increase consumer costs

January 12, 2010

New Jersey preparer/blogger Robert D Flach doubts that preparer regulation will increase consumer costs:

I cannot see that registration and licensure of tax preparers is going to substantially increase the cost of tax preparation. I already earn more than 15 CPE credits in continuing tax education a year – so there is no additional cost to me there. And to be honest, any unenrolled tax preparer who was not already taking at least 15 hours of continuing education per year certainly should have been.

There are several ways that costs are likely to increase.

First, you are likely to reduce the supply of preparers through any licensing regime. That's the idea, after all. Basic economics say lower supply with the same demand means higher costs.

Also, any regulation regime imposes compliance costs - not just potentially additional continuing education, but also the costs of doing the new IRS paperwork -- time is money, and time spent doing paperwork has a cost. Not to mention the time and money preparers will spend trying to keep their doors open when their paperwork disappears in black hole of the new preparer bureaucracy. These inevitably get passed on to the consumer.

My long-form discussion of the new preparer rules is here.

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Wells-Fargo SILO shelters 'worse than KPMG?'

January 12, 2010

Jack Townsend on the Wells Fargo SILO deals shot down in the Court of Federal Claims last week:

I don't think that these transactions are materially different than the transactions involved in the KPMG prosecutions; indeed at some level they may be worse. As I have said, criminal tax cases are all about the lie. And, there appears to have been lies in these transactions.

And that's the nicest thing he has to say about the deals.

Prior Tax Update Coverage: Bureaucrat vs. Bureaucrat

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The trouble with Barry bearer bonds

January 12, 2010

Andrew Mitchel explains:

Under Code § 165(j), no deduction is allowed for losses sustained on bearer bonds. For instance, if a bearer bond is purchased and later resold at a loss, no deduction would be allowed for U.S. tax purposes. This is quite an unusual rule and many tax preparers may not be aware of it.

In addition, Code § 1287 denies capital gain treatment for gains on bearer bonds. For instance, if a bearer bond is purchased and later resold at a gain, the gain would be taxed as ordinary income.

These are most likely to be seen in offshore accounts, so look out.

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Don't worry, they'll do better spending your money with tax credits.

January 12, 2010

Anybody who thinks the state of Iowa has any business giving away your money to to other businesses using tax credits in the name of "economic development" needs to explain why Honey Creek Resort is such a good idea:

Iowa's $58 million government-owned Honey Creek Resort ran a deficit of almost $900,000 in its first nine months of operation, a state audit released Monday shows.

That led one lawmaker to revive his proposal to more fully outsource operations of Iowa's first "destination park," which has a lodge, cabins, golf course and indoor water park.

Excuses were made:

Advocates said, however, that it is unfair to judge the resort so soon, especially since the state encountered bad weather and budget difficulties around the time the complex opened in September 2008. And the national recession has hit tourism hard, they said.

"We have to be realistic here," said Pat Boddy, deputy director of the Iowa Department of Natural Resources, which owns the resort. "Typically, no business operates in the black in its first few years."

Really? Most businesses that don't start turning a profit "in its first few years" don't survive those first years. They run out of money. But if you can tap the taxpayer's wallet, you can lose for a long, long time. That's why economic development credits and other corporate welfare schemes always waste your money -- there's no threat of financail failure to keep them honest. The politicians can give your money to their friends indefinitely without going into Chapter 7.

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When we're boring, we demand your full attention.

January 12, 2010

Professors at some big law schools are banning classroom portable computers, reports Above the Law:

You know, if I didn’t know better, I’d say that Villanova, Albany, and Chicago have lost sight of the fact that students are [paying] to be in those classrooms. This isn’t high school. Students spending class time playing Warcraft aren’t truants — instead, they are bored out of their minds, and deserve a better, more interesting class experience than their professors are providing.

The TaxProf is cool with technology. What about Villanova's tax maven Jim Maule?

Maybe they should just limit the technology to the state of the art of my student days.

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Via the TaxProf.

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It's Turbotax Timmy!

January 11, 2010

Vox Populi:

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Yes, our readers have overwhelmingly chosen the Treasury Secretary, who famously omitted thousands of dollars of taxes from his returns and blamed his tax software. He easily outpaced a strong field to become the Tax Update's 2009 Taxpayer of the Year. While he gets no cash as a result, the prestige of the award is truly immeasurable.

William Halby, the tax lawyer who deducted over $100,000 of money he spent on prostitutes as a "medical expense," made an impressive showing towards the end of the polling, but he couldn't catch up with our Turbotax Treasury Secretary.

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Report: ax the film credit, cap others.

January 11, 2010

The state agency supergeniuses who have been reviewing Iowa's corporate welfare tax credits issued their report Friday. While their recommendations are surprisingly bold for a bunch of state agency heads, they fall far short of what makes sense.

They recommend:

- repealing eight credits, including the two film credits.
- eliminating the ability of taxpayers to sell unused credits - a big attraction for a number of tax credit programs, including historic rehab credits
- requiring all tax credits to sunset after five years.
- capping all tax credits.
- ending "refundability" of research credits -- that is, not writing checks to taxpayers who have credits in excess of their tax, making it a pure subsidy.

The report also calls for evaluating tax credits "using sound cost-effectiveness analyses techniques that incorporate appropriate assumptions."

While these recommendations would be a big improvement, they fall far short of the right answer -- getting rid of all of the economic development credits.

As long as the credits are still around, even in limited form, they are troublesome. There will continue to be political pressure to make credits available to favored groups and to loosen restrictions on transferability, especially as time passes and people begin to forget about the film credit disaster. The sunset provisions are likely to be a joke, like the perpetually-expiring federal tax "extender" provisions. And the "cost-benefit studies" either won't be done or they will be made using assumptions rigged to make the credits appear beneficial.

It's unlikely that the legislature will approve even these limited recommendations. The corporate welfare lobbyists are already unhappy with the report:

The recommendations drew criticism from Dave Roederer, executive director of the Iowa Chamber Alliance, which represents chambers of commerce and economic development groups across the state. He said economic development tax credits that have been used the most have been the most successful, creating more research jobs.

"Why would we be sending a signal to business and industry throughout the country, as well as in Iowa, that we don’t think we’re going to provide the incentives that we provided you in the past?" Roederer said.

Even the fattest target, the scandal-plagued film credit, might not die:

The top Democrat in the Iowa Legislature still gives the state tax credit for movie and TV productions a 50/50 chance of survival, despite today’s recommendation from the governor’s top agency directors that the credit be eliminated.

If they won't even kill the most frivolous and outrageous program to take our money and give it to the well-lobbied, they aren't likely to carefully manage the rest of them.

The right answer, of course, is for the state to get out of the business of issuing "economic development" tax credits. The state has no demonstrated skill in picking up-and-coming industries, as the bankrupt ethanol plants littering Iowa show. Their only skill is in taking money from my business and yours and using it to subsidize our well-lobbied competitors.

The economic development game is about developming an economy of fixers and lobbyists. If it were about actually developing an economy for the rest of us, they would embrace the Quick and Dirty Iowa Tax Reform Plan.

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Who says there's no money in education?

January 11, 2010

Russ Fox reports:

The former Education Dean of the University of Louisville pleaded guilty last Friday to nine charges of embezzlement and tax fraud. Robert Felner embezzled $1.7 million from the University of Rhode Island, and followed that up by embezzling $570,000 from the University of Louisville. He tried to embezzle another $270,000 from Louisville, too. He did manage to pilfer $88,000 from the Rock Island, Illinois County Counsel on Addiction.

But he didn't pay the taxes on his stolen funds. Imagine that.

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Can Congress reimpose the estate tax retroactively?

January 11, 2010

If you are pondering the ultimate tax planning move, Joel Schoenmeyer gives you reason to pause.

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How cold is it?

January 09, 2010

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It's sundog-gone cold.

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Bureaucrat vs. Bureaucrat

January 09, 2010

20100109-1.jpgOne federal agency encourages local agencies to participate in flaky tax shelters, to the chagrin of the federal tax agency:

The SILO transactions here are offensive to the Court on many levels. A cadre of company executives, in concert with teams of well known legal and accounting firms and other consultants, regularly constructed and participated in these tax schemes for Wells Fargo, apparently blind to professional standards of care. Representatives from the Federal Transit Administration (“FTA”) encouraged transit agencies to participate in SILO transactions as a way to raise additional funds, without seriously considering the probable adverse tax treatment of the transactions.

It works out badly for Wells-Fargo; the Claims Court ruled against 26 of their SILO tax shelters. Via the TaxProf.

Cite: Wells Fargo & Co., Fed. Cl. No. 06-628T.

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A wire-to-wire win for Geithner?

January 08, 2010

Our Turbotax Treasury Secretary continues to lead the Taxpayer-of-the-year 2009 balloting.

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Don't let his youthful hairdo blind you to a whole slate of worthy contenders. Be a good citizen, make up your own mind, and vote today! And tomorrow!

Who is the 2009 Taxpayer of the Year?
Brad Birkenfeld
Nick Cage
Helio Castroneves
Joe Francis
Tim Geithner
William Halby
Peter Hendrickson
Kent Hovind
Rev. Anthony Jinwright
  
pollcode.com free polls

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Why the tax law is as appetizing as road kill

January 08, 2010

If we have congresscritters with time to write bills like HR 4388, it's time for them to all go home:

‘(8) SPECIAL RULE FOR CONTRIBUTIONS OF WILD GAME MEAT-

‘(A) IN GENERAL- In the case of a charitable contribution by an individual of qualified wild game meat, the amount of such contribution otherwise taken into account under this section (after the application of paragraph (1)(A)) shall be increased by the amount of the qualified processing fees paid with respect to such contribution.

‘(B) QUALIFIED WILD GAME MEAT- For purposes of this paragraph, the term ‘qualified wild game meat’ means the meat of any animal which is typically used for human consumption, but only if--

‘(i) such animal is killed in the wild by the individual making the charitable contribution of such meat (not including animals raised on a farm for the purpose of sport hunting),

‘(ii) such animal is hunted or taken in accordance with all State and local laws and regulations, including season and size restrictions,

‘(iii) such meat is processed for human consumption by a processor which is licensed for such purpose under the appropriate Federal, State, and local laws and regulations and which is in compliance with all such laws and regulations, and

‘(iv) such meat is apparently wholesome (under regulations similar to the regulations under section 22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act).

‘(C) QUALIFIED PROCESSING FEE- For purposes of this paragraph, the term ‘qualified processing fee’ means any fee or charge paid to a processor which fulfills the requirements of subparagraph (B)(iii) for the purpose of processing wild game meat, but only to the extent that such meat is donated as a charitable contribution under this section.’.

What? No provision for deer taken legally with a fender? It's an outrage!

If every congresscritter were required to do their own return via a live webcast (and archived for continuous amusement), we wouldn't see so many stupid little proposals like this. This certainly isn't the worst bill ever - or even the worst this week - but even little bad ideas add up.

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Congress contemplates another tax bill. Flickr image under Creative Commons by goingslo.

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Accurate, but fake

January 08, 2010

The supergeniuses evaluating Iowa's corporate welfare system are set to recommend which tax credits to keep and which to get rid of today. The correct answer would be "keep none, trash them all," but the recommendation is likely to be about the opposite, with insincere pledges of transparency and careful monitoring thrown in for looks.

The Des Moines register reports:

John Frew, Culver’s chief of staff, has said it is unlikely lawmakers will eliminate any big incentives. But he predicted they will review the size of the tax breaks and factors such as whether credits can be refunded or transferred.

State officials say they believe most of the five credit programs provide substantial benefit to the state, but several have yet to document a clear return on investment.

That's a technically accurate statement, but it is just as accurate, and a lot more useful, to say there is no evidence that a single one of the 30-odd credits has a "return on investment" -- whatever that means for a program that has no equity and earns no interest or dividends. There is no evidence that the state's supergeniuses can wisely allocate capital via tax credits, or that it is a good idea to take your money and use it to lure and subsidize your competitors.

Tax.com reports that it doesn't work in Georgia. It doesn't work here, either.

Related: Giving us your money is good for you. No, we can't prove it, so give us more money.

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Your preparer offers to do your return right now with just your pay stub?

January 08, 2010

Robert D Flach correctly advises "just say no."

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If estate tax is dead, so is the date-of-death basis step-up.

January 08, 2010

Chicago estate lawyer Joel Schoenmeyer explains.

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Geithner: you really like him!

January 07, 2010

While the popularity of the Obama administration may be slipping, Tax Update readers love the Obama Treasury Secretary, if our Taxpayer of the Year Polling is any indication. It takes quite a man to outpoll both porn magnate Joe Francis and randy 78-year old tax lawyer William Halby, but so far Mr. Geithner is up to the challenge.

Who is the 2009 Taxpayer of the Year?
Brad Birkenfeld
Nick Cage
Helio Castroneves
Joe Francis
Tim Geithner
William Halby
Peter Hendrickson
Kent Hovind
Rev. Anthony Jinwright
  
pollcode.com free polls

But don't be a mere follower. Check out all of our Taxpayer of the Year - 2009 candidates and vote today, and then some!

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Passive activity: not just an oxymoron; it's the law!

January 07, 2010

Only 23 years after the "passive activity" rules became law, the IRS has decided how taxpayers should report changes in how they "group" their "activities" (Rev. Proc. 2010-13).

The 1986 Tax Act set up the passive activity rules to shut down that era's breed of tax shelters. Losses from activities in which a taxpayer is "passive" are deferred to the extent they exceed "passive" income until the "activity," whatever that means, is disposed of.

The tax law says activites other than rental activities are generally passive or non-passive based on how much time a taxpayer spends on the activity -- the "material participation" rules. For example, if a taxpayer spends 500 hours working in an activity in a year, it is non-passive. Also, if a taxpayer has multiple activities with 100-500 hours of involvement, and they add up to more than 500 hourse, they are non-passive. Rental activities are normally passive, exept for certain full-time real-estate professionals. A more complete summary of the "material rules is below the fold.

So what is an "activity?" It matters because if you have a lot of activities, you will have a hard time getting to 100 or 500 hours for any of them; but If you have only one activity, and it's passive, you have to sell the whole thing to take your accumulated passive losses.

Until now, the IRS hasn't really required taxpayers to disclose how they "group" their activities. The tax law provides for a specific election -- the Sec. 467(c)(7) election -- for real estate professionals to "group" their real estate activities -- but otherwise groupings aren't explicitly reported.

The new revenue procedure doesn't require an annual schedule to report all of a taxpayer's groupings, but it does require taxpayers to report changes in groupings, starting with 2011 returns. It appears that the IRS is worried about people combining too many groups:

...if a taxpayer is engaged in two or more trade or business activities or rental activities and fails to report whether the activities have been grouped as a single activity in accordance with this revenue procedure, then each trade or business activity or rental activity will be treated as a separate activity for purposes of applying the passive activity loss and credit limitation rules of section 469. Notwithstanding the previous sentence, a timely disclosure shall be deemed made by a taxpayer who has filed all affected income tax returns consistent with the claimed grouping of activities and makes the required disclosure on the income tax return for the year in which the failure to disclose is first discovered by the taxpayer. If the failure to disclose is first discovered by the Service, however, the taxpayer must also have reasonable cause for not making the disclosures required by this revenue procedure.

Taxpayers should use this new Revenue Procedure as a reminder to think about their activities. Many entrepreneurs have a lot going on. They might have one 500-hour activity and several others. Can all activities reasonably be grouped together? If not, should the sub-500 hour activities be grouped to make sure they all get to 500 hours together? Should any of the sub-500 hor activities be combined to get them over the 100-hour threshold? Has the nature of any activities changed in a way that means the groupings should be changed? And do you have a way to prove your participation to an IRS agent? Keep a calendar to make sure.

Related: Real-estate agent wins passive loss argument in Tax Court

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Two Taxpayer Advocates in one!

January 07, 2010

Taxpayer Advocate Nina Olson came out with her annual report yesterday. She says of the IRS, "This level of service is unacceptable."

Funny. Not long ago she led the charge to shut down the pilot program to have private collection agencies collect some overdue federal taxes. Based on her criticisms of private collection, you'd have thought IRS was the gold standard of customer service.

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Expect delays

January 07, 2010

Russ Fox on the proposed IRS rules regulating tax preparers:

The IRS expects to begin to implement this in 2011. I expect delays and a very lengthy implementation schedule. The IRS announced plans to privatize the Special Enrollment Examination (the exam that allows an individual to become an Enrolled Agent); it took two years before that actually occurred. While something may begin in 2011, I expect this process to take the better part of the new decade.

He also has a sobering discussion on how well preparer regulation works in California, which already regulates preparers (hint: not very).

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2010: Year of the Roth conversion?

January 07, 2010

You can make a (taxable) conversion of a regular IRA to a Roth IRA this year regardless of your income level. Robert D Flach talks about some of the ins and outs of a conversion.

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Iowa: bad tax policy curverbreakers

January 07, 2010

Christopher Bergin is appalled that a Congresscritter proposes a federal tax credit for "soybean-based electrical transformer fluid." Heck, Iowa is so far ahead of the curve that we've had one for years -- mercifully repealed as of the end of last year. But the best part of the post is an innovative proposal from commenter Gerald Prante of the Tax Foundation:

...we should just eliminate all itemized deductions and credits and have two schedules:

Schedule Good
Schedule Bad

Schedule Good would give you (refundable) tax credits for doing things that some lobbyist pays off some congressman to say is good like owning a house, going green, having kids, giving to charity, raising pets, holding the door open for old ladies, etc.

Schedule Bad would impose essentially a "surtax" based on how bad you are. Here we can have things like a formula where you enter your weight and your height and there is a penalty for being obese (based upon your BMI).

Sadly, it wouldn't take much of a change at this point.

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The top ten Ag law and tax developments of 2009

January 07, 2010

Roger McEowen has the list. Bats are involved, so, ladies and gentlemen, Bat for Lashes:

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Are you going to let Turbotax Tim run away with this?

January 06, 2010

Tim Geithner is starting to pull away in Taxpayer of the Year - 2009 voting. This seems like a disservice to hard working taxpayers like William Halby, who deducted (with extensive documentation!) $125,000 he paid for prostitutes -- as medical costs. It is disrespectful to Brad Birkenfeld, who looks like he'll be rewarded with jail time for helping the IRS break the wall of Swiss bank secrecy.

Don't stand for it! Cast your vote today!

Who is the 2009 Taxpayer of the Year?
Brad Birkenfeld
Nick Cage
Helio Castroneves
Joe Francis
Tim Geithner
William Halby
Peter Hendrickson
Kent Hovind
Rev. Anthony Jinwright
  
pollcode.com free polls

Background on all of the worthy candidates here.

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S corporation health insurance: where's the deduction?

January 06, 2010

A question in the comments to an old post:

If the corporation paid the premiums for the shareholders and included the premium amount on the W2s, does the corporation get to deduct the premium amount as expense? I think in the past this has been not deducted by the corporation and then deducted by the shareholder as insurance, but it seems like nobody is getting a deduction if it is included in income and then deducted as insurance on the 1040 - that has a net zero effect. So, does the corporation get the deduction for the insurance?

Here's how it works:

- S corporation deducts the health insurance; it's a form of compensation expense.
+ The shareholder picks up the insurance premium as wage income.
- The shareholder deducts the insurance premium as self-employed health insurance.

So: two minus, one plus. If the shareholder-employee is also the 100% owner, he deducts it twice and includes it once, for one net deduction.

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Your wife commits insurance fraud. You repay. Can you deduct?

January 06, 2010

Peter Dentist hires his wife, Karen, to handle insurance company billing for the dental office. Mrs. Dentist went a bit overboard and billed insurance companies for work that was never done. This displeased the insurance companies, and the dentist ended up paying it back. He had picked up the fraudulent payments in his Schedule C income, so he reasonably deducted the repayments there. This generated a net operating loss, so he carried them back to claim refunds from earlier years.

The IRS was OK with a deduction, but they wanted to call it a non-business deduction. Non-business deductions only generate NOLs to the extent of non-business income, so the deduction would be worth a lot less to the dentist. The Tax Court sorted things out yesterday.

The tax law says that you can't be in the business of fraud and embezzlement, so Karen Dentist wouldn't be entitled to a Schedule C deduction. But it's different for Peter:

This strikes a nerve with the Commissioner, who bristles at seeming to give Karen a tax benefit. And we agree with him that Karen could probably not get carryback-generating deductions if she were filing by herself. But the Supreme Court has said, "The deductions to which either spouse would be entitled would be taken, in the case of a joint return, from the aggregate gross income." Helvering v. Janney, 311 U.S. 189, 191 (1940). We have interpreted this to mean that one spouse may take a deduction on the joint return even if the other spouse would be prohibited from taking the same deduction. DeBoer v. Commissioner, 16 T.C. 662 (1951) (loss on sale to wife's grandson deductible by husband, despite prohibition on recognition of losses to family members, because husband not himself related to grandson),6 affd. 194 F.2d 289 (2d Cir. 1952). So even though Karen could not deduct the payments as business expenses on the Cavarettas' joint return, we hold that Peter is not similarly barred.

The Moral? If your husband-wife business defrauds insuarance companies, make sure only one spouse knows about it.

UPDATE: More at Federal Tax Crimes blog.

Cite: Cavaretta, T.C. Memo. 2010-4

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What do you do if your old employer is a tax cheat?

January 06, 2010

TaxGrrrl, who finished a respectable 5th place in ABA voting for Practice Specific law blogs, takes on a perplexing problem for an ex-employee.

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Geithner rules?

January 05, 2010

The Turbotax Treasury Secretary has jumped out to an early lead in Taxpayer of the Year - 2009 voting, but other candidates are beginning to pick up support. Cast your vote today!

Who is the 2009 Taxpayer of the Year?
Brad Birkenfeld
Nick Cage
Helio Castroneves
Joe Francis
Tim Geithner
William Halby
Peter Hendrickson
Kent Hovind
Rev. Anthony Jinwright
  
pollcode.com free polls

Be an educated voter and check out the candidates here.

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Preparer regulation: prepare for a mess.

January 05, 2010

The IRS has come out with its long-threatened batch of new regulations for paid preparers. The plan will require preparers who are not CPAs, lawyers or enrolled agents to pass some sort of competency exam and to take 15 hours of CPE. Nothing good will come of this.

- It will drive market share to the big franchised preparers like H&R Block, Liberty Tax, and so on, as they will find ways to make sure that their people pass the perfunctory exam.

- It will be a compliance nightmare for little tax-prep shops. Anybody who has ever tried to get the IRS to straighten out an ID number error can imagine how hard it will be for a small preparer to get redress when the IRS computers eat the CPE filings.

- It will eventually apply to everyone. Sooner or later some CPA or lawyer will get in trouble, and the IRS will move to apply to them "the same standards we apply to H&R Block."

- The perfunctory CPE and competency tests won't significantly improve the quality of the work. It will just ensure that bogus deductions and credits will be claimed on returns prepared by IRS-approved cheaters.

- It will raise the prices to taxpayers and motivate more of them to do their own returns, which can hardly improve return accuracy.

The only sure way to improve tax compliance is to simplify the tax law and eliminate the most egregious opportunities to cheat, like refundable credits. Since that isn't going to happen, the IRS will saddle the innocent with paperwork that won't solve the problems.

The proposal has everyone talking:

TaxProf Blog
Kay Bell
William Perez
Russ Fox
Eva Rosenberg
Robert D Flach
Dan Meyer

I'll cover this more at Going Concern in the next day or so. UPDATE: my GC piece.

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I blew up the Swiss banking system and all I got was this lousy orange jumpsuit

January 05, 2010

Brad Birkenfeld is learning that nobody likes a snitch. Even though he is largely responsible for cracking Swiss banking secrecy, the judge says that doesn't make up for his own tax offenses:

Birkenfeld had pleaded guilty to a single fraud conspiracy count in June 2008, when he acknowledged helping his largest U.S. client hide assets from the Internal Revenue Service.

In a claim disputed by Birkenfeld’s lawyers in a Dec. 7 letter to U.S. Attorney General Eric Holder, Justice Department officials said the jail time was justified because he was not initially forthcoming about the tax fraud committed by his billionaire U.S. client Igor Olenicoff.

All is not lost for Mr. Birkenfeld, however:

Oh, well, at least he still has some possibility for a whistleblower claim in the mega-millions.

If he can get 30 percent of all of the money from the offshore tax cheats the IRS is going to get, 40 months in Club Fed may pass by quickly. And if you vote for him as 2009 Taxpayer of the Year, he'll have that going for him.

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It also allowed for shorter coffins

January 05, 2010

Back before medical science made it more easy to verify that your ticker has stopped, wills had provisions to be sure you only died once, reports Joel Shoenmeyer:

The Victorians invented a system of bells with strings attached that went through the ground and into the coffin, so if you woke up underground you could pull on your bell till someone came to dig you up. There's no record of anyone being saved by one of these devices. People made all sorts of odd stipulations in their wills, such as asking to be decapitated as insurance against an undesired revival."

Now you can just insist on being buried with your cell phone. Don't forget your extra battery, and check out reception in the cemetery just to be safe.

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Not before you have your W-2

January 05, 2010

William Perez ponders the question "How soon can you file a tax return?" Wait until you have the W-2, all of your 1099s, and any K-1s, for sure.

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A polite way of saying 'it was just a big waste of money'

January 05, 2010

The Congressional Research Service says lower prices, not the homebuyer tax credit, have gotten houses selling again:

Results presented in this report suggest that lower home prices and low mortgage rates were quantitatively more important in stabilizing the housing market than the tax credit. For example, the effect of home prices and mortgage rates on the typical buyer's mortgage payment is estimated to have been about eight times that of the first two versions of the tax credit. In addition, lower home prices and mortgage rates tended to benefit first-time and repeat buyers, as opposed to the tax credit which until recently just benefited the former. Estimates of the number of additional home purchases that can be attributed to the ARRA and WHBAA versions of tax credit are presented and compared to those reported by private industry analysts. The estimates raise questions about those reported by industry analysts, as well as questions about how effective the tax credit may have been at reducing the home inventory.

In other words, if you lower the price of houses to the market-clearing level, they sell. How about that.

Via the TaxProf.

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Turbotax Timmy? Dancing Helio? Let's pick the 2009 Taxpayer of the Year!

January 04, 2010

Now that 2009 has been over for several whole days, we can look back with the perspective of history to determine a worthy Taxpayer of the Year for 2009. Prior winners are ineligible, while those who win awards from other major tax sites are automatically nominated. Without further ado, the candidates:

Who is the 2009 Taxpayer of the Year?
Brad Birkenfeld
Nick Cage
Helio Castroneves
Joe Francis
Tim Geithner
William Halby
Peter Hendrickson
Kent Hovind
Rev. Anthony Jinwright
  
pollcode.com free polls

To learn more about our candidates, read on!

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Only a man with a heart of stone...

January 04, 2010

...will fail to be moved to tears by this heartfelt plea for freedom for convicted tax cheat oppressed freedom-fighter Wesley Snipes.

As a touching evocation of deeply-felt emotions, it rates right up there with this one:

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It's return time already?

January 04, 2010

You may have already gotten your Christmas present of a tax forms package from the IRS. Even though the 1040 isn't due until April, the time to start getting ready for it is now. Find a nice safe place to put all the 1099s that will be rolling in, along with your K-1s, W-2s and 1098s, and then read Robert D Flach's advice on how to get ready to prepare your return, or to visit your preparer.

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It's 10 below. Time to look into a rural Iowa condo?

January 04, 2010

A grain condominium, perhaps. Paul Neiffer explains at Farm CPA today.

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