Tax Update Blog: March 2010 Archives
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Filing season tip: No K-1? Don't panic!
March 31, 2010
Lots of taxpayers think a partnership or S corporation will get in trouble because they haven't gotten K-1s out yet. After all, aren't they supposed to get them to you by January 31?
No.
The deadline for filing partnership returns is actually April 15, and they can extend that until September 15. The S corporation deadline is March 15, or September 15 with extensions. There's no requirement for K-1s to go out any sooner.
Why does it take so long? Think how hard it is to get your 1040 together, how much information you have to get together. That's a small fraction of what you have to do to prepare the return for a real business. There are inventories to be taken, accounts to be reconciled, adjusting entries -- and that's all before you even start doing a return that has to deal with inventory capitalization, Section 199, multistate issues, and so on.
Partnership and S corporation income ends up on the tax returns of their owners. The K-1 breaks out the results of the business year so you can put it in the right spots on your 1040. It's worth waiting for.
If you don't have a K-1, don't panic. Get your tax information to your preparer so that you can get as much done as you can. If you don't get the K-1 in time to file your return by April 15, don't just file and plan to fix it later. It's always better to extend than amend -- not least because that way the IRS only gets one return to beat on instead of two.
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St. Louis firm settles with IRS, survives
March 31, 2010
The IRS attack on a St. Louis CPA firm ended in a settlement yesterday that falls far short of what the IRS initially sought.
In February 2008 the feds sued Zerjav & Company P.C. to permanently ban its principals from the tax business as a result of a spectacular series of alleged violations:
The complaint alleges that Tiger Zerjav’s co-workers have called him “the magician” because numbers on tax returns co-workers prepare are “magically” different after he reviews and edits them.According to the complaint, the defendants’ bogus deductions reduced many customers’ reported income so dramatically that the clients claimed to be qualified for the Earned Income Tax Credit. That credit was intended to help the working poor.
Among the defendants’ alleged improprieties cited in the complaint were tax deductions claimed for such non-deductible personal expenses as children’s day camp, residential landscaping costs, cable television bills, house cleaning expenses, baby-sitting expenses and fitness center dues.
Defendants allegedly prepared a federal income tax return for one client’s corporation that fraudulently deducted $25,000 for the client’s personal purchase of a sport utility vehicle. According to the complaint, the client, a former National Hockey League player, had bought the SUV and owned it personally. Under federal tax law he was not permitted to deduct the cost of the vehicle, so defendants fraudulently treated the vehicle as being owned by his corporation and had the corporation deduct it.
But the settlement signed yesterday falls far short of a permanent ban:
The order entered by Judge Richard E. Webber of the U.S. District Court for the Eastern District of Missouri bars Frank "Tiger" Zerjav Jr. from preparing tax returns and providing tax advice for three years, and permanently bars his father, Frank Zerjav Sr., from engaging in specified conduct.The court order, to which the defendants consented, requires one of the Zerjavs' businesses, The Advisory Group Inc., to be shut down by April 1, 2010. The Zerjavs' other business, Zerjav & Co., is permanently barred from specified conduct.
Among the specified conduct enjoined is:
* claiming business deductions for non-deductible personal expenses;
* improperly deducting restaurant meals, child care expenses and education expenses;
* changing customers' accounting records without informing the customers of the changes;
* reporting compensation that is not reasonable or related to work performed; and
* claiming deductions for wages paid to children unless services are actually rendered and the wages are reasonable.The court also imposed a five-year monitoring period during which a neutral monitor, who must be a licensed CPA or attorney, will annually at the defendants' expense inspect and review a sample of tax returns prepared by defendants to ensure that the court's order has not been violated.
In other words, they are barred from doing stuff preparers aren't allowed to do anyway. While Tiger Zerjav can't "prepare" returns, the court order shows he's certainly not out of the business:
Tiger Zerjav shall be permitted to conduct administrative, managerial, marketing and business-development services on behalf of Zerjav & Company, L.C. and Zerjav & Company, P.C. during the three-year tax-preparation and tax-advice injunction period referenced above.
Considering the initial charges, it's hard to see how this is less than a win for the preparers. Yes, it will be a hassle to have somebody looking over your shoulder, but that's a long way from being out of business.
This leads you to two potential conclusions: either the initial allegations were unsupportable (there is no admission of wrongdoing), or the prosecution of the case by the Government was inept. Neither conclusion supports giving the IRS more ability to shut down preparers with less due process, but that's where we're headed.
Prior Tax Update Coverage:
Judge rules IRS can't shut down Clive preparer
Humboldt preparer: trucker's dream, IRS nightmare?
UPDATE: Comments on this post are closed. We'll just say the Zerjav firm has passionate fans and opponents, and I don't care to oversee a flame war.
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Scenes from a regulated restaurant.
March 31, 2010
Mary O'Keeffe demurs on my conclusions about the unwisdom of further tax preparer regulations:
We regulate restaurants for health code reasons, and perhaps that regulation causes restaurants to have higher prices.It's still legal to do your own home-cooking.
That doesn't change the fact that it's still a good idea to regulate restaurants for health and safety codes.
Two points: one, tax preparers are already regulated. Not a week goes by without the Justice Department announcing the jailing, sentencing or shutting down of a bad tax preparer. The new regulations will fall just as much on the just as the unjust -- more on the just, actually, because they are less likely to game them, and certainly less likely to write them. The evidence that the benefits of the added regulation will be worth the costs just isn't there.
Two: restaurant regulation is no substitute for management that wants its customers back. It's not in the interests of restaurateurs to poison their customers, and that -- not regulation -- is what keeps a place clean. As this government-inspected restaurant illustrates:
Related: IRS power grab over prep industry: the first invoice is announced
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Going out like a lamb Carnival
March 31, 2010
Our three-month long snow blanket has been gone only about three weeks, but the last day of March in Des Moines will get us to 78 degrees.
So get out and celebrate at Kay Bell's all-new livestock-themed Carnival of Taxes!
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The Government's GAAP Gap
March 31, 2010
If you don't think the government is hopelessly underwater, Jr. Deputy Accountant invites you to think again:
Statistics generated in Williams' most recent newsletter demonstrate the real 2009 federal budget deficit was $4.3 trillion, not the $1.417 trillion previously reported by the Congressional Budget Office, according to the 2009 Financial Report of the United States Government as released by the U.S. Department of Treasury Feb. 26.The difference between the $1.417 trillion "official" budget deficit numbers and the $4.3 trillion budget deficit based on data reported in the 2009 Financial Report of the United States Government is that the official budget deficit is calculated on a cash basis in which all tax receipts, including Social Security tax receipts, are used to pay government liabilities as they occur.
Ah, but if we just raise taxes on the rich, we can cover things, right?
"The government cannot raise taxes high enough to bring the budget into balance. You could tax 100 percent of everyone's income and 100 percent of corporate profits, and the U.S. government would still be showing a federal budget deficit on a GAAP accounting basis."
Have a nice day.
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TaxProf, Tax Analysts get together
March 31, 2010
Excellent news from the TaxProf:
I am delighted to announce that Tax Analysts has agreed to partner with TaxProf Blog in making some of its wonderful content available to the broader tax community. In particular, each week I will post three full-text items from Tax Analysts' flagship publication, Tax Notes Today, as well as three full-text items each from State Tax Today and Worldwide Tax Daily. And of course, all Tax Analysts content is available through the LexisNexis® services.
Our office subscribes Tax Analysts, and I'm a huge fan. The new arrangement with the premier tax blog is a great opportunity for more people to see the fine content Tax Analysts has to offer.
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Filing Season Tip: File that homebuyer-credit claim the old-fashioned way
March 30, 2010
While it's of doubtful use economically, the first-time homebuyer credit is definitely worth claiming when you qualify. The IRS struggles to process claims for the $8,000 refundable credit (you get it even if your tax is zero) because it is a fraud magnet. If you don't want to wait many months for your credit, make sure you give the IRS everything it wants with the return.
You can't e-file a claim for the credit. Your return with Form 5405 needs to be filed on paper.
- You have to file a 1040. You can't use either short-form 1040, and you can't file the Form 5405 by itself.
You have to attach a signed settlement statement. The IRS says:
For most homebuyers, this will be a properly executed Form HUD-1, Settlement Statement (U.S. Department of Housing and Urban Development) that includes:* Names and signatures (if available) of all parties involved,
* Property address,
* Purchase price, and
* Date of purchase.If you purchased a mobile home and do not have a settlement statement, you should attach a copy of your executed retail sales contract showing all parties' names and signatures, the property address, the purchase price and the date of purchase.
If you are claiming the credit for a newly constructed home and you do not have an executed settlement statement, you should attach a copy of your certificate of occupancy showing the name of the taxpayer, the property address, and the date of the certificate.
Of course, you need to make sure you qualify.
Check back every day through April 15 for more 2010 tax filing season tips!
Image credit: Image by Boris T. Johnson under Creative Commons license.
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Strangest hobby ever
March 30, 2010
The Tax Court yesterday disallowed losses from an accounting practice under the "hobby loss" rules of Section 183.
The objective facts indicate that petitioner's primary purpose was not to realize a profit. Petitioner acknowledged that relatively few of his clients ever paid, yet his expenses consistently exceeded his revenues by a sizable margin. In fact, petitioner admitted that his "business" had been profitable for only 1 of its 10 years of operation. Furthermore, petitioner's own testimony reveals that he subjectively did not intend to operate his "business" for profit. Petitioner testified that despite the difficulties in collecting from his clients, he continued his activity "both as a service to the public and * * * as a contribution to the community".
Most people would prefer a more glamorous form of community service, like picking up dog poop at the local park.
Cite: Elverson, T.C. Summ. Op. 2010-36
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Preparer regulation: it works by making you pay more for me
March 30, 2010
I don't believe additional preparer regulation is necessary. It will raise costs to taxpayers without increasing the quality of the service enough to make it worthwhile.
Peter Pappas finds the price increase a feature, not a bug:
The truth is, tax return preparation prices have historically been too low because of the lack of even a single barrier to entry into the profession.¹ The lack of standards artificially drives down price. That’s because a profession that has no standards is no profession at all, and its “members” are not entitled to charge a premium merely by claiming that it is one.
This is a wonderful example of Public Choice Theory in action. Established players use the power of government to set up barriers to entry, enabling them to raise prices because competition is reduced.
My view is that there are already plenty of ways for preparers to distinguish themselves. Enrolled Agents, CPAs and Attorneys all have distinctive credentials, enabling them to charge more. Peter is both a CPA and an Attorney, and I'm sure he can charge more than some guy at Liberty Tax Service. But not everybody needs a CPA/Attorney. Some people just need somebody to help them claim an earned income credit, or to walk them through Schedule A. And there are plenty of people without letters after their name who do a good job preparing returns. The market - the voluntary interaction of millions of individuals - is far better suited to match individuals with the right level of preparer than Doug Shulman is.
One consequence of higher prices will be that fewer people will use preparers. It's still legal to do your own return. It's hard to see how that will improve the finished product.
Related: Preparer regulation: prepare for a mess.
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'Bipartisan' means they're ganging up on you
March 30, 2010
Iowans Praise Bipartisan Support for Extension of Ethanol Tax Credit
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The toothless tax bandwagon
March 30, 2010
Everybody seems to be noticing that the "personally responsibility requirement," the rule fining folks who don't buy health insurance, is toothless. There is now coverage at:
- Marginal Revolution (thanks for the link!)
- BigGovernment.com
- TaxProf.blog
- Megan McArdle
- Megan's betrothed, Peter Suderman
And even Instapundit.
Commenters on some of the blogs suspect IRS would adopt a rule applying any withholding first to the fee. That sort of flexibility isn't out of the question, but it doesn't appear in the rules, so it might not work. If the IRS has no authority to enforce or collect the fee, as seems to be the case, then taxpayers could leave the fee off their returns without fear -- leaving nothing for the IRS to apply payments to.
Whatever fix Congress or IRS eventually come up with, one thing is clear: considering that the individual mandate is key to making the whole Obamacare thing work, they sure screwed it up.
UPDATE: At the TaxProf blog, two tax professors look at the statute and conclude that the IRS still has some collection tools, primarily its right of offset against other payments. But if there is no penalty for leaving the tax/fee/penalty/whatever off your tax return in the first place, and no interest charge for late payment, then not reporting is still a good bet. One prof says a technical correction would be in order. Full repeal should do the trick.
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It's when they stop crying that you better watch out
March 30, 2010
Sometimes tax bills leave clients in tears, reports Going Concern. Trust me - it can get a lot worse than that.
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Be careful not to get stung Cavalcade!
March 30, 2010
There's a new Cavalcade of Risk up!
The blog world's premier collection of insurance and risk management posts is up at ozrisk.net.
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Filing Season Tip: The NOL foot-fault
March 29, 2010
Update, 5/6/2010: IRS allows automatic relief for late NOL elections.
Losing money in your business is never good, but there is a silver lining: the ability to carry back losses to recover prior taxes. That opportunity is especially valuable this year because of a temporary provision that allows taxpayers to recover taxes paid as long as five years ago. The normal carryback period is two years. You can choose to carry the loss back either 3, 4 or 5 years, or just the normal 2 years. You can also elect to skip the carryback and elect to carry the loss forward only. If your loss was in 2008, you can carry that back five years instead of your 2009 loss.
But there's a catch: if you file a loss 1040 on April 15 and fail to make an election to carry your net operating loss back for more than two years, you lose out on the 3-5 year carryback. By failing to make the election on the timely-filed return, you foot-fault to the two-year carryback.
So if you are looking at an NOL this year, and you or your preparer haven't had a chance to analyze how far to carry the loss back, extend your 1040. Extending the 1040 extends the time to carry the loss back. If you have already filed a 1040 without including the carryback election, you can file an amended 1040 with the election by April 15.
Link: Rev. Proc. 2009-52, with detailed IRS guidance for the five year carryback
Related: IRS issues guidance for 5-year carrybacks for 2008 and 2009
This is the first of our daily set of tips for the 2010 filing season. Catch 'em all!
Image credit: Flickr image courtesy All Champs Tennis Academy under Creative Commons license.
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IRS power grab over prep industry: the first invoice is announced
March 29, 2010
IRS Commissioner Doug Shulman is rolling out pieces of his power grab over the tax prep business:
Under the proposed regulations, the IRS will issue forms, instructions, or other guidance that will require paid tax return preparers to begin using PTINs for all tax returns and refund claims filed after Dec. 31, 2010. Currently, tax return preparers must use either a PTIN or their social security number on tax returns or refund claims that they prepare.The proposed regulations also provide that tax return preparers must apply for a PTIN, regularly renew the PTIN, and pay associated user fees, which will be described in upcoming guidance. As part of the process, some tax return preparers would also be subject to a tax compliance check, which could include a review of the preparer’s history of compliance with personal and business tax filing and payment obligations.
And when the IRS misplaces the paperwork of a solo tax practice in Missouri or Iowa, we can count on Doug Shulman giving them just as much attention as H&R Block or Jackson Hewitt, right?
Bruce, The Missouri Tax Guy, notes the obvious:
My peers and friends in the “field” say there won’t be that much extra cost, I say there will be enough cost to the preparer that this will undoubtedly raise preparer charges thus raising the cost to taxpayers who use paid preparers, we shall see.
Not only the fees charged by the IRS, but the wasteful busy work of filling out a new round of pointless paperwork, and then the time and cost of dealing with the inevitable mistakes and IRS mishandling of it.
Many well-meaning folks support the Shulman power grab because "something must be done" about bad preparers. This shows a touching faith in the ability of government regulation to solve problems that has no support in recent history (Sarbanes-Oxley, meet Lehman Brothers). Instead the big industry players will capture the regulatory process -- an ex-H&R Block official wrote the draft preparer rules for IRS -- and use it to preserve their own position, stifle smaller competitors who lack corporate staffs to deal with regulations, and raise prices.
I wonder: if a preparer has bad things to say about Doug Shulman on a blog, surely there's no chance that the IRS will misfile that preparer's paperwork and visit with an extra-special "tax compliance check," is there?
Related: Preparer regulation: prepare for a mess
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The absolute final definitive write-up on health-care tax stuff
March 29, 2010
A new piece by Roger and me at the ISU Center for Agricultural Law and Taxation.
The Tax Policy Blog has a handy summary of the revenue associated with each piece of the health care mish-mosh.
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Shining a Searchlight on naughty deductions
March 27, 2010
The Tea Party Movement is having a shindig in Harry Reid's hometown, Searchlight, Nevada. Sen. Reid has written a history of the place, but it took a work of fiction about Searchlight to earn a little place in tax history. From a 2005 Tax Update post:
Ralph Vitale was a technical writer for the U.S. Treasury, but he harbored greater literary ambitions. He decided his Great American Novel would be "a story about the experiences of two men who travel cross-country to patronize a legel brothel in Nevada."A stickler for verisimilitude, Mr. Vitale incurred significant "research" expenses. As a good Treasury employee, he attempted to comply faithfully with Section 274, recording the time, the other party, and the business purpose of his expenses. The result was "Searchlight, Nevada" (currently # 2,217,075 in the Amazon bestseller list).
The IRS tried to disallow all of Mr. Vitale's expenses on "hobby loss" grounds. The Tax Court decided that Mr. Vitale was genuinely seeking to profit from the book. The court drew the line at the "interview" expenses at the brothel:
However, no deduction is allowed for the interview expenses. We find that the expenditures incurred by petitioner to visit prostitutes are so personal in nature as to preclude their deductibility. In evaluating whether certain expenses are personal or qualify as business expenses under section 162, the Court has found that some expenses are so "inherently personal" that they almost invariably are held to come within the ambit of section 262.
I would work a Harry Reid joke in somehow, but I would hate to give offense to honest working girls. The lesson you can draw from this case is that if your work looks too much like naughty fun, the courts will find a way to make your naughty expenses non-deductible.
Cite: Vitale v. Commisioner, T.C. Memo. 1999-131.
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Universal food coverage
March 26, 2010
Howard Gleckman at TaxVox justifies the requirement for health young men to subsidize other people via the "personal responsibility requirement" to buy health insurance:
One day soon, I would like to walk into my neighborhood supermarket, load up my cart with goodies and walk out the door. When I’m confronted by security about the matter of paying for the stuff, I’ll just tell them to make everyone else in the store pick up the tab....
For years, federal law has required most hospitals to accept patients into their emergency rooms whether or not the sick and injured have the means to pay. If you run your car off the road and break your leg, the EMTs don’t demand to see your insurance card or ask, “credit or debit?” They trundle you off to the nearest hospital--which must fix you up.
This care is, of course, not free. Those of us who are insured pay for it. Indeed, the medical business survives on the black art of cost-shifting—that is to say, spreading the costs of those who can’t (or won’t) pay to those who can.
Of course, by this logic Mr. Gleckman is forcing people who aren't buying groceries to pay for his, but one of his commenters does a nice job on the grocery analogy:
Well, lets say there were food insurance. But as with health insurance today, it doesn't just cover emergencies, but everyday care --got to make sure people are getting good food! Now you can go to the grocery store and the first thing you will notice is that there are no prices on anything. Of course not, insurance is covering it. So you fill our cart with whatever and as much as you want. Except, wait, you can only get things on your plan. So no Kellogg's cereal for you! Oh well, guess you can eat General Mills. So after you gather all this food, you roll through checkout where the grocery clerk checks over your food selection to make sure it meets all the insurance requirements --lots of paperwork involved. But no money is needed, except for a small co-pay if you have that kind of plan. Of course you paid for the food with your premium, which isn't cheap, but hey you got a hell of a lot of food! You notice some poor man in that uninsured line complaining about the cost of apples --something about $50 apples.
The story will end with empty shelves and special stores for special customers with connections.
Related: The IRS Will Enforce Mandatory Healthcare Using the Honor System
Links:
In Iowa, Obama Calls Health Bill 'Pro-Business'
$150 million cost tied to health law, Deere says
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The lessons of sports last a lifetime
March 26, 2010
Lessons like "work the refs":
Former Buffalo Bills running back Darick Holmes got the break of his life Thursday when a federal judge sentenced him to a year of home confinement in a tax fraud case.Holmes, 38, pleaded guilty last year to 15 felony counts of tax fraud. He admitted running a scam in Buffalo, teaching people how to file bogus income tax returns.
That's the sort of thing people go to jail for! Surely the judge made an example of Mr. Holmes. No?
While advisory sentencing guidelines called for a prison term of 12 to 18 months, U.S. District Judge William M. Skretny put Holmes, now living in Pasadena, Calif., on probation for three years, including one year of home confinement with electronic monitoring.The judge said he believes Holmes is remorseful for his crimes. He added that he is impressed by the fact that Holmes has spent many years mentoring teenagers in rough neighborhoods in California.
His attorney says he didn't get a break just because he was a football star:
"I believe he got a break because he has used his status as a football player to help kids," the attorney said.
Oh, that's different, then.
It would be interesting to learn whether the judge has Bills tickets.
UPDATE: Going Concern has more.
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Dinero Rapido está cerrado (Update - not necessarily cerrado)
March 26, 2010
A Kansas tax preparer gets an early vacation:
A federal judge in Kansas City, Kan., has issued a preliminary injunction barring a Garden City, Kan., tax preparer, Jose Lares, from preparing returns with false dependent exemptions and false filing statuses, the Justice Department announced today. Lares operates Dinero Rapido Tax Service in Garden City.
Why did his tax season come to an early end?
According to the government complaint, Lares claims false dependent exemptions and false filing statuses on customers' returns.
That doesn't mean Mr. Lares actually did this stuff. It's possible he just doesn't want to fight the largest law firm in the world, and it's easier to do something else. But it does provide a warning: if a preparer is getting miraculous tax results, it could be too good to be true. If a bad preparer gets caught, all of his clients get audited, and it can get surprisingly expensive.
Update: Mary O'Keeffe notes in the comments that the injunction only prevents Mr. Linares "from preparing returns with false dependent exemptions and false filing statuses," presumably leaving him free to prepare other returns. The Justice Department is still seeking to shut him down altogether.
Prior Coverage: Dinero Rapido tiene problemas
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Oh, you know that money you've already made? We want it.
March 26, 2010
David Brunori talks about a scheme afoot in Connecticut to slap a big surtax on bonuses to executives of TARP recipients:
The Connecticut Attorney General Richard Blumenthal says it's legal. But that does not make it right. I am all for taxing these guys. But the state should do it up front -- and prospectively. No one should be told that they owe a new tax on money they earned in previous years. Today, the Connecticut legislature is going after bonuses of more than $1 million. But tomorrow they may go after much less affluent folks who paid their taxes in previous years. It is not the right way to run the government.
When they do it to "them," it's just practice for doing it to you.
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How to drive away businesses
March 26, 2010
When I started my business I chose Irvine because it’s a low tax environment (for California) with a strong pro-business climate. If I were in Los Angeles, I’d pay a business gross receipts tax at the highest percentage for Los Angeles. My City of Irvine business license costs $50 a year. I’d pay at least ten times that much in Los Angeles
I suspect lots of other businesses have figured that out.
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What's more abusive: loss carryback refunds, or taxes that exceed your income?
March 25, 2010
So now it's somehow shady to not pay income taxes on money you haven't made. That's the implication of a Wall Street Journal article yesterday about the "little-noticed" five-year loss carryback provision in one of the recent tax bills:
Some critics have found the corporate-tax-refund technique wanting as a stimulus or job-creation move. Prior to Congress's passage of the $787 billion stimulus law in early 2009, the Congressional Budget Office looked at six possible stimulus approaches and ranked this one least effective, saying each corporate tax dollar refunded would generate at most 40 cents of boost to gross domestic product. The corporate-tax-refund approach wasn't included in the big stimulus bill early in the year but was part of legislation in November that extended jobless benefits.Douglas Shackelford, a tax professor at the University of North Carolina at Chapel Hill, said using federal tax receipts to shore up corporate balance sheets amounts to "public borrowing to pay off private debt…It's not clear to me that's a good use of money at all."
I could make a long list of worse uses of tax dollars than in preventing corporations from paying astronomical tax rates. Let's say Shackelford, Inc. makes $10 million each year for five years. It pays $3.5 million each year in taxes, or $17.5 million in total.
Then in Year 6, Shackeford has a $40 million loss. If it can carry the loss back five years, it can recover the taxes paid on $40 million, getting back $14 million. Over the six-year period, then, Shackelford, Inc. has made a net $10 million and paid taxes of $3.5 million - the statutory 35% top rate. That doesn't seem abusive, that seems like what should happen.
Had the five-year carryback not been enacted, Shackelford, Inc. would have only been able to carry its loss back two years, offsetting $20 million in income and recovering $7 million in taxes. Over the six-year period, the company would have paid $10.5 million in taxes on net income of $10 million -- a 105% effective tax rate. Yet Professor Shackelford says, and the Wall Street Journal reporters imply, that the 105% rate is a perfectly fine result.
Even though the "little-noticed" (nonsense!) temporary five-year carryback is better than the usual two-year carryback, it comes with some limitations and some stupid technical rules that can make it useless.
- It can only offset up to half of taxable income in the earliest year of the five-year carryback.
- It requires an election on either a timely filed tax return or by the extended due-date of the return (and only if the return is actually extended). This is a trap for people who want to file the loss carryback claim by the normal December 31 due date. Somebody who files a 1040 with an NOL by April 15 and fails to elect the carryback is stuck with the normal 2-year carryback.
- It is unavailable for TARP recipients.
If you qualify for the five-year credit, take it. And you don't have to feel the least bit guilty.
Hat tip: Kay Bell.
Related: IRS issues guidance for 5-year carrybacks for 2008 and 2009
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Des Moines. Do More!
March 25, 2010
Get more, do more, whatever. As long as it's subsidized:
An attorney for the state asked a Los Angeles film producer during a court hearing Wednesday over public records why his budget for the movie "Blackbeard" doubled twice — to $20 million — as it geared up for production last year in Des Moines.Filmmaker Kip Konwiser — whose project was among many that stalled last fall after the suspension of Iowa's film program — insisted he was not trying to inflate his budget to get millions more in tax credits, as other filmmakers are alleged to have done in an ongoing criminal probe.
No, he was just trying to help Iowa by quadrupling the amount of transferable film credits he qualified for.
Rather, the award-winning filmmaker said he was intentionally trying to help former film chief Tom Wheeler build Iowa's movie industry by greatly expanding the amount of in-state work done on his film and, thus, the number of Iowans hired."Your implication was that I raised the budget to get more," Konwiser said to Jeffrey Thompson, a deputy attorney general representing the state. "I did it to do more."
See? The Greater Des Moines Partnership's slogan has caught on!
Mr. Konwiser (wonderful name, considering the history of the film credits) is fighting a freedom-of-information lawsuit to keep the public from knowing how he used his film-credit subsidies.
Konwiser testified that releasing such information goes against the industry norm, and could be devastating to him and other filmmakers - even to the point of bankruptcy. That's because disclosure would wreck some private contractual agreements that require confidentiality.Konwiser said he repeatedly was assured by the economic development department and Wheeler that his budget would be kept confidential.
Yeah, you don't want the rubes to know how badly they've been taken.
Related: Let them eat canapes.
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Think of it as a studio in a project with excellent security
March 25, 2010
Creativity doesn't end when your sentence starts:
Four inmates in Wisconsin's largest women's prison have been charged with tax fraud after trying to receive tax credits for living in apartments even though they were behind bars.
Well, what else are they supposed to do? Unless the prison goes condo, they won't qualify for the first-time homebuyer credit.
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It's good to be king; Prince, not so much.
March 25, 2010
The artist formerly not known as Prince has some Minnesota tax problems, reports TaxGrrrl:
Carver County (southwest of Minneapolis) tax records show that the singer’s music company owes more than $227,000 for 2009 taxes to the state and local authorities. Several properties in the singer’s own name are also delinquent, with an estimated total of $450,000 in back taxes owed.
No word on whether the taxes date back to 1999.
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It's unworkable, it's insane, and it has a bunch of tax provisions
March 25, 2010
Paul Nieffer has a rundown of tax provisions in the health-care train wreck at Farm CPA Today.
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It's like mandatory volunteerism
March 24, 2010
My thoughts on the seemingly-toothless new "personal responsibility requirement" to buy health insurance are up at Going Concern.
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Welcome, traveller!
March 24, 2010
Do you know that many states want to tax you even if you work only a single day within their borders? It's true. The New York Times recently reported:
If you live in Boston but spend one out of 250 workdays this year in New York, you owe New York income taxes on 1/250th of your salary. And vice versa if you are a New Yorker visiting Boston - or Anywheresville, for that matter - for business.
Such taxes are a recurring nightmare for small businesses. A bill in Congress, HR 2110, would keep states from taxing workers spending fewer than 30 days in a state, but it excepts athletes and entertainers from this protection. I know of one congresscritter who might support the bill if that exception would go away.
The Tax Policy Blog reproduces this excellent map from the Council of State Taxation of state approaches to visiting workers:
States are desperate for revenue, and improved data-mining makes it easier to snag businesses who straggle across the border. Don't count on this problem going away.
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Governor to sign tax credit haircut; it will grow back.
March 24, 2010
Governor Culver plans to sign SF 2380, the bill trimming back some of Iowa's 30-odd economic development tax credits.
The bill followed up a study by some of the Governor's leading aides that was unable to show that any of the tax credits do any good. A sensible response would have been to junk the whole system and use the savings to lower tax rates, but that was never in the cards.
The biggest planks of the bill are a two-year suspension of the scandal-ridden Film Tax Credits and a lowering of the cap for some business tax credits from $185 million annually to $120 million. If you can't even eliminate a credit as ridiculous and embarrassing as the film tax credit, you just aren't serious.
The legislators unwittingly proved one thing: that these credits are about politics and influence, not economic growth. Consider:
- One of the biggest abuses cited by the tax credit review panel was credit transferability, enabling people to sell tax credits at a discount to line their own pockets. The biggest remaining transferable credit is the historic rehabilitation credit. State Senator Jack Hatch and the husband of the Democratic candidate for U.S. Senate are both big rehab credit developers. Not surprisingly, transferability isn't touched by the bill.
- Two "feel-good" credits - the "young farmer tax credit" and the "State Tuition Organization" credit for contributions to private school tuition -- went untouched. Not because they demonstrably do anything for the economy, but because they have powerful, if narrow, constituencies.
As long as the legislature accepts the premise that it has any business financing specific private interests, these credits will always go to the influential and the well-lobbied. The idea that they do anything for the rest of us is a cynical fig leaf. Far better to make Iowa a better state for everyone to do business by adopting the Quick and Dirty Iowa Tax Reform.
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Jade still broken
March 24, 2010
The first big IRS "Son of Boss" tax shelter victory was upheld yesterday by the Federal Circuit Court of Appeals, reports the TaxProf. The Court abated the penalties on procedural grounds, but upheld the Court of Federal Claims decision that the shelter lacked economic substance.
We wrote of the initial decision:
The case involved three Texans who together had $40 million in capital gains on which they didn't care to pay taxes. They each bought bought a Euro option for $15,000,020 and sold an offsetting option for $14,850,018 - a spread of $150,002. Any increase in the value of one option was almost perfectly offset by a decline in the value of the other option, so there was only $150,002 really at stake, and that was all the each of the Three Texans were out-of-pocket. Well, that and $900,000 in fees to the promoters and facilitators of the shelter.The partners contributed the offsetting positions to Jade Trading LLC, which was treated as a partnership under federal tax rules. They claimed a basis of $15,000,020 basis in each partnership interest, relying on a technical reading of the tax law that ignored their "contingent" liability for the $14,850,018 option they wrote. They then sold their partnership interests for their $150,000 fair market value, claiming the $14,850,000 difference as a capital loss.
This shelter was sold by the BDO "Wolf Pack," a tax-shelter marketing arm that has since come to grief.
Cite: Jade Trading, LLC, CA-FC 2008-5045
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Tweet
March 24, 2010
Check out Kay Bell's "Tax Twitter Tuesday" and find out what 140 characters can do for your tax planning.
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A call to, um, arms
March 24, 2010
The vast shortage of competent, professional, tax advisors and accountants for escort service businesses, brothels, and your run-of-the-mill houses of ill repute can go on no longer. If not for the business opportunity, then for the good of your fellow Americans and maybe your state’s dire fiscal situation.
Of course, not everybody wants to qualify for this sort of work.
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LLCs preferred 3 to 1 in Iowa over the next leading brand
March 24, 2010
Marc Ward reports:
The formation of Iowa LLCs continues to outpace corporations. In 2009, 8,422 LLCs were organized in Iowa compared to just 2,571 for-profit corporations. This is a better than 3 to 1 ratio. This is consistent with almost every other state in the Union save California and New York.
Marc also explains why New York and California are unfriendly to LLCs.
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Then call in the bomb squad
March 23, 2010
Howard Gleckman at TaxVox:
I have never quite seen a law so full of powerful tax bombs attached to delayed fuses. The two biggest: A stiff new Medicare tax on high-earners that does not bite until 2013 and a tax on high-cost health insurance that does not kick in until 2018—long after the end of an Obama second term, if he has one.
Let's hope they defuse this bomb before anybody gets hurt.
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Touch play, touch tax
March 23, 2010
An Afton, Iowa man who leased "Touch play" machines during the Iowa lottery touch-play frenzy has pleaded guilty to tax evasion. Scott Mitchell, the owner of Central Iowa Amusements, has pleaded guilty to evading $93,000 in taxes. KGAN.com reports:
Mitchell was the owner of Central Iowa Amusements, which leased acrcade-style games to businesses across the state in exchange for a percentage of the profits.In his plea agreement, Mitchell admitted withholding financial data from his tax preparer, allowing him to evade taxes of more than $93,000 over the three-year period.
The crime? From the plea agreement:
a. The Defendant intentionally withheld bank records or financial records from his tax preparer, and provided misleading and incomplete information to be used in preparing his tax returns.b. The Defendant knowingly and willfully submitted fraudulent federal income tax returns for tax years 2004, 2005 and 2006, and
c. in the tax returns referenced above, the Defendant intentionally failed to disclose income that would have required him to pay7 substantial additional taxes in the estimated amount of over $95,000 combined, including an estimated substantial tax of no less than $50,000 for 2004.
Federal tax sentencing guidelines start at a 21-27 month sentence for a $95,000 tax loss, though the sentencing judge can go up or down from that.
The Des Moines Register reported that Central Iowa Amusement's revenue from Touch Play machines was $464,676.
The Moral? Always tell the truth to your tax preparer. Also, having your revenue in the paper is probably as good as a 1099 form.
Link: US Attorney press release.
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When the IRS is the House, it always wins, even against professional gamblers
March 23, 2010
The tax law limit on gambling losses -- they are itemized deductions and allowable only to the extent of gambling winnings -- applies even if you are a professional gambler. Gambling tax maven Russ Fox explains how the Tax Court sorts this out.
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Individual insurance under Obamacare: mandatory, but optional?
March 23, 2010
The Tax Policy Blog highlights the Joint Committee on Taxation explanation of the Obamacare penalty for failure to buy health insurance:
The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.Footnote from JCT regarding subtitle F: IRS authority to assess and collect taxes is generally provided in subtitle F, “Procedure and Administration” in the Code. That subtitle establishes the rules governing both how taxpayers are required to report information to the IRS and pay their taxes as well as their rights. It also establishes the duties and authority of the IRS to enforce the Code, including civil and criminal penalties.
So what does it mean? You have a tax, but they can't make you pay it? Yeah, that will work.
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Offshore compliance amnesty: A 99.7% Failure?
March 23, 2010
Last year's big foreign account amnesty was an enormous bust, argues international tax lawyer Phil Hodgen:
. I take that position based on a simple fraction. Its numerator is the number of people who have done the voluntary compliance for undisclosed foreign accounts. The denominator is the number of people who should do it....
The nominator in the fraction is 14,700 [participants in the amnesty]...
Here’s my take on the denominator (not discussed in the panel presentation). Figure there about 38,000,000 immigrants living in the United States. Let’s say 5% of those retain sufficient ties to their home countries so they still have accounts there in excess of $10,000. That’s 1,900,000 people. In my experience this is pretty common, especially for immigrants from India, Asia, and the Middle East. They have families there and it is easy to remit funds to their families this way.
What about Americans living abroad? Let’s say 6,000,000 because I’m too lazy to look for better statistics. For these people who are living a normal life abroad, how many have accounts where they live with balances above $10,000? Shall we say 50%? Here’s another 3,000,000 people.
My denominator is 1,900,000 + 3,000,000 = 4.9 million. My fraction is 14,700/4.9 million or 0.3%.
He also says:
The IRS churned out gallons of sludge to regulate deferred compensation plans, creating massive and unnecessary complexity. They’re in the process of doing the same in the offshore tax compliance world. For those of you who utter “409A” as an epithet, you know what I’m talking about.
In that case, the entire offshore compliance effort has gone entirely off the rails. Considering that the draconian penalties for offshore compliance foot-faults aren't accomplishing much, a different approach might be in order.
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Will preparer registration prevent this sort of thing?
March 22, 2010
Joe Biden gives tax advice (via The Tax Prof):
Visit msnbc.com for breaking news, world news, and news about the economy
Vice President Biden, about 2 minutes in:
You go to Whitehouse.gov and it will literally give you a menu and you'll lay out there and say this is what you're entitled to, fill this out, these are the forms you need, and we'll literally walk... it's not hard.
Wow, it will literally give you a menu. If only they allowed substitutions.
This will only add to his glory.
Via ReasonTV.
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It's insane, it's unworkable, so they had to ram it through right away
March 22, 2010
The Senate version of the health care bill brought the members of two parties together with a common vision last night. Unfortunately, the bipartisan opposition wasn't enough to overcome the left-side Democrats, who were able to ram the Senate's health care mish-mash through with no Republican support. But they aren't done yet, so it's not clear exactly what the tax provisions will be.
The tax provisions of the original Senate Bill included set of new taxes:
- a 40% non-deductible excise tax on "Cadillac" health plans, effective in 2013.
- a doubling of the penalty on non-qualified distributions from HSAs, to 20%, effective in 2011.
- a weird new 1/2% "medicare tax" on wage income of single taxpayers over $200,000 and joint filers with income over $250,000, effective in 2013.
- A special tax on medical device manufacturers and importers starting this year, because you don't want cheap pacemakers, do you?
- A special tax on health insurance providers starting this year.
- A tax on drug manufacturers and importers starting this year.
- A $2,500 limit on flex-spending cafeteria plan contributions, effective in 2011.
In addition, the Senate bill trims back some deductions and caps compensation for the now quasi-nationalized health insurance providers, with their products mandatory and with their terms dictated by the government.
But there's more! Maybe.
While the House approved the Senate passed bill, which the President can now sign, it also approved a "fix" bill, HR 4872. If that bill clears the Senate, which seems likely, a new "Medicare Tax" of 3.8% would apply to investment income - interest, dividends, rents and capital gains - of individuals with AGI over $200,000 and joint filers with AGI over $250,000. It would also apply to K-1 income from passive activities. This massive tax increase on investment income would apply beginning in 2013.
- The House "fix" would defer the $2,500 flex-account cap to 2013.
- The medical device annual fee would be replaced by a 2.9% tax on the sale of medical devices.
- The pharmaceutical fee would be deferred to 2012.
- The "economic substance doctrine" would be codified, with new penalties and no reasonable cause exception.
- The "channel stuffing" acceleration of third-quarter 2014 estimated tax payments would be increased by 14.5 percentage points.
This "fix" amounts to a huge increase on the taxation of business income. Under current law as scheduled to apply in 2011, interest, dividends, rental income and ordinary passive activity income would be taxed at a top federal rate of 43.7%, compared to the current 35% and the scheduled 39.6%. Capital gains would be taxed at 23.8%, compared to the current 15% rate and the schedule 20% rate.
There will be a great push to enact the fix this week. So far the administration and its Congressional allies have managed to steamroller this thing through, so this seems likely to pass too.
We'll look at the parts of this in more detail in the coming days. Meanwhile, Roger McEowen has an excellent, more detailed summary.
UPDATE: Via the TaxProf,
* Technical Explanation of the Revenue Provisions (JCX-18-10)
* Estimated Revenue Effects (JCX-17-10)
The Tax Foundation Timeline of Tax Provisions in the House Health Care Bill
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The Federal Marshals run a different kind of escort service
March 22, 2010
A Utah escort service operator shockingly failed to report all of her taxable income, reports Russ Fox. She can expect to have an escort from the Marshals Service when she reports to Club Fed.
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Hope, Changed
March 22, 2010
An Obama voter ponders the federal health care takeover voted into law last night:
What I hope is that the Democrats take a beating at the ballot boxand rethink their contempt for those mouth-breathing illiterates in the electorate. I hope Obama gets his wish to be a one-term president who passed health care. Not because I think I will like his opponent--I very much doubt that I will support much of anything Obama's opponent says. But because politicians shouldn't feel that the best route to electoral success is to lie to the voters, and then ignore them.
Oops.
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I'm not guilty, my accountants should have caught me
March 22, 2010
A business owner in Maine hid receipts in secret accounts that she hid from her accountants. When she went to trial for tax evasion, she said the accountants didn't do enough to stop her. Conviction ensued, and the 1st Circuit Court of Appeals didn't think it was the accountants' fault:
The government's evidence allowed the jury to find that St. Pierre, in diverting company income to personal ends but not reporting it as income to the company or herself, had acted against warnings; that St. Pierre had used multiple personal accounts not disclosed to accountants; that the scale of diversion was huge; that the accountants were unaware of most of what was occurring; and that St. Pierre herself engaged in creating false documents to cover her tracks.
The Federal Tax Crime Blog has details.
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Details on the 'Jobs' bill
March 22, 2010
Roger McEowen provides details on the recently-enacted "jobs" legislation, including the forgiveness of employer FICA and the $1,000 tax credit for "qualified" new employees.
Andrew Mitchell has more on the international tax "shoot the jaywalker" $10,000 penalties for failing to disclose foreign assets:
The accuracy related penalty under Code § 6662 is also modified to include penalties for “undisclosed foreign financial asset understatements.” The penalty is 40% rather than the typical 20% understatement penalty. Interestingly, an “undisclosed foreign financial asset” does not need to be a financial asset at all. An “undisclosed foreign financial asset” means:any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections.The types of assets required to be reported under Code §§ 6038, 6038B, 6038D, 6046A, and 6048 do not only include financial assets. For instance, Code § 6038B requires the reporting of certain nonrecognition transfers of “property” to foreign persons. Such transferred property can, and often does, include non-financial assets. Consequently, the penalty for undisclosed foreign financial assets can be imposed on non-financial assets as well as financial assets.
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'Jobs' bill provides hiring credit, extends $250,000 Section 179 limit
March 19, 2010
The President yesterday signed HR 2847, the latest "jobs" bill, into law. The centerpiece of the bill is a provision forgiving employer FICA (but not Medicare) tax on "qualified" employees hired after February 3 for payroll earned from today thorugh December 31, 2010.
A "qualified employee" is one who has worked less than 40 hours in the 60 days prior to employment. This gives employers a perverse incentive to make potential hires sit out a little while, getting a little more broke, before they start, just to make sure they've been out of work for 60 days. That's stupid tax policy for you. The break is unavailable for employees who replace other employees, or for relatives of 50% owners. A $1,000 tax credit will also apply to qualified employees who stay on the payroll for 52 straight weeks.
Of course, these provisions will do little or nothing to encourage hiring. You hire new employees when you need them to take care of customers. No tax break will make you hire people to stand around. But for those fortunate enough to be hiring anyway, it will be found money.
The bill also extends the $250,000 limit for Section 179 deductions -- the deduction for assets that would otherwise have to be capitalized and depreciated -- through 2010. It had been slated to fall to $136,000 for this year.
The bill also has some offshore tax enforcement provisions, including some more shoot-the-jaywalker $10,000 minimum penalties for foot-fault violations.
The TaxProf Blog has a roundup, and Kay Bell has more.
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New Jersey - wanting to be best at being the worst
March 19, 2010
TaxGrrrl reports on efforts in New Jersey to make the place as miserable as possible:
When Gov. Christie revealed his budget plans, which included painful spending cuts all around, both Republicans and Democrats alike appeared surprised to see tax cuts… for the rich. Gov. Christie’s budget failed to extend the recent increase in the state’s top income tax rate, initially put into place by then Gov. Jon Corzine (D). The result is that the top 2% of NJ taxpayers will face a reduced rate in the upcoming tax year while other taxpayer rates stay the same. The cost in lost revenue? About $1 billion.
Chart by the Tax Foundation; click for larger image
New Jersey had enacted a "temporary millionaires surtax" to help pay for the state's spending binge. Now that the Governor says that temporary really means temporary, the spenders are appalled. But for the state with the nation's worst business climate, it's good news for everyone not on the state payroll.
More from Peter Pappas.
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Over-rated
March 19, 2010
"Five overrated tax planning ideas" at Going Concern. Or, if you prefer, tax planning urban legends.
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But in a good way, surely
March 19, 2010
Allen Greenspan, homicidal maniac?
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Family partnerships: do they qualify for the annual gift tax exclusion?
March 19, 2010
They don't always. If there are too many restrictions on owner rights, gifts of family partnership interests could fail to qualify as "present interests," which means they don't fall under the $13,000 annual gift tax exclusion. Roger McEowen explains how recent court cases apply this rule.
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IRS announces Applicable Federal Rates (AFR) for April 2010
March 19, 2010
The IRS has issued (Rev. Rul. 2010-11) the minimum required interest rates for loans made in April 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.67%
-Mid-Term (loans from 3-9 years): 2.70%
-Long-Term (over 9 years): 4.40%
The Long-term tax exempt rate for Section 382 ownership changes in April 2010 is 4.03%.
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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Iowa: Closed for business?
March 18, 2010
The bill limiting some of Iowa's economic development credits passed the Iowa Senate yesterday on a party-line vote. One opponent said that it was bad news for Iowa businesses, reports O. Kay Henderson:
Senator Randy Feenstra, a Republican from Hull, summed up the G.O.P.’s objections. "States around us — Minnesota, Nebraska, Wisconsin — are all increasing their tax credits to generate more business and more opportunity," Feenstra said. "It seems the states around us have a direct, opposite rationale about how to create business. Iowa reduces tax credits and it shows business and companies that we are closed for business."
Sadly, that ship sailed long ago. Iowa has the nation's highest corporate income tax rate, at 12%. Even taking account our partial deduction for federal taxes, we have the second-highest rate. We have a high individual rate. We have the fifth-worst business tax climate in the country. We aren't going to fix that by bidding against our neighbors to bribe companies to come here.
The way to fix that problem is to leave the bribery to our neighbors and instead to make Iowa a good place for everybody to start and run a business. Instead of our current high-rates and 30-odd economic development tax breaks, lets try this:
- Eliminate the corporation income tax.
- Knock down the individual rate to 4% or so.
- Get rid of our corporate welfare tax breaks, tax code clutter, and corporate welfare subsidies like Vision Iowa and the Iowa Office of Energy Independence to pay for it.
In other words, don't fight a losing battle for corporate welfare, for tax breaks that only go to people with expensive advisors and lobbyists. Fight for the Quick and Dirty Iowa Tax Reform instead!
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S corporation banks score big win in Seventh Circuit
March 18, 2010
Sometimes the tax code means just what it says.
So said the Seventh Circuit Court of Appeals yesterday in a decision that's welcome news for hundreds of S corporation banks. They overturned a Tax Court decision that disallowed interest deductions to S corporation banks holding municipal bonds -- primarily Midwestern community banks.
The tax law has two provisions that disallow deductions for banks holding municipal bonds. One rule, Section 265, disallows all interest deductions attributable to purchases of "non-qualified" municipal bonds purchased after August 7, 1986. Another rule, Sec. 291, disallows 20% of the interest expense attributable even to "bank-qualified" bonds not subject to the Sec. 265 disallowance. In both cases the amount of the interest expense disallowance is determined by the ratio of the bank's investment in muni bonds to their total assets.
Another Section of the Code, Section 1363(b)(4), seems to exempt S corporations from the 20% disallowance on "bank-qualified" bonds -- known among bankers as the "20% TEFRA" disallowance -- after three years of S corporation status.
(b) Computation of corporation’s taxable income The taxable income of an S corporation shall be computed in the same manner as in the case of an individual, except that—(4) section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.
Bankers long assumed that this means what it says: that after three years of being an S corproation, the Section 291 20% disallowance goes away. The IRS had other ideas. They said that the rules allowing them to write regulations for S corporation banks enabled them to apply Section 291 to all S corporation banks, and last year they got the Tax Court to go along.
The IRS had less luck convincing the Seventh Circuit, and Judge Posner:
The government argues that because section 291, and the amendment to it that created the 80 percent rule (for remember that originally it was an 85 percent rule), entered the Internal Revenue Code before banks could be subchapter S corporations or QSubs, Congress never intended section 1363(b)(4) to prevent the application of section 291 to banks, and so should be taken to have authorized the Treasury to rescind that application by regulation, as Congress's delegate.But section 1361(b)(3)(A) doesn't say or hint that.
It's good news for bankers, and for those who think the tax law should mean what it says. Still, the IRS may not be done. They can still litigate the issue in other circuits; the Eighth Circuit, which includes Iowa, is a likely venue because it has so many S corporation banks. They shouldn't, because the Seventh Circuit has it right, but we should know in two or three months.
What should taxpayers do now? Banks that have been S corporations for more than three years should feel free to ignore the Section 291 "20% TEFRA" disallowance; if they are not in the Seventh Circuit, they should disclose that they are doing so to protect themselves from potential IRS penalty assessments. Shareholders of S corporation banks that have been filing returns under the now-overturned Tax Court decision should file refund claims on Form 1040-X. The statute of limitations for non-extended 2006 returns expires April 15, 2010; you can wait until after tax season for later years.
Banks that filed prior-year returns under the now-overturned Tax Court decision should file amended returns and give modified K-1s to their shareholders so they claim refunds on amended 1040s. This is especially urgent for any banks that filed 2006 returns with the Section 291 20% TEFRA disallowance, to help their shareholders file amended 2006 returns before the statute expires next month. All S corporation banks should contact their shareholders as soon as possible to let them know whether they filed their 2006 returns taking the 20% TEFRA disallowance that the Seventh Circuit overturned yesterday. No S corporation returns prepared for 2006 by Roth & Company will need to be amended as a result of this decision.
Taxpayers who don't receive amended K-1s for 2006 showing the correct amount of S corporation bank income might need to file a protective refund claim to preserve their 2006 refund rights.
What should the IRS do? They should comply with the tax law as enacted and tear up their proposed regulations requiring long-time S corporations to apply Sec. 291.
Cite: Vainisi, CA-7, No. 09-3314
Prior Coverage:
BANKING ORGANIZATIONS COME OUT AGAINST IRS 'TEFRA' REGULATION PROPOSAL
Tax Court rules for IRS in S corporation bank TEFRA disallowance
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If he had succeeded in killing her, would he have been an argument for the FairTax?
March 18, 2010
When a desperate loser killed an IRS agent and himself with an airplane in Texas, some people foolishly used him as a symbolic victim of the income tax, or the software industry's rules on independent contractors, or something. Congressman Steve King said that if we had just listened to him and enacted the FairTax national sales tax, that murder-suicide would never have happened.
Earlier this week another loser's battle with the IRS came to a quieter end. An appeals court upheld Floridian Randy Nowak's conviction for attempting to hire a contract killer to kill an IRS agent. Mr. Nowak apparently felt the agent was getting too close to his offshore accounts. For good measure he wanted to burn down the local IRS office.
You don't need to be a defender of the tax code to realize that murdering IRS agents is a bad thing. You don't see anybody using Mr. Nowak's plight -- he'll probably never be out of prison alive -- as an argument against the tax law. Still, the only difference between Mr. Nowak and the Austin tax kamikaze is that Mr. Nowak failed. That should give pause to anybody who views the Austin guy as something other than a selfish loser.
Cite: Nowak, CA-11, No. 09-11329
Related: Tax anger nearly causes another tragedy
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Iowa has high income taxes, but at least our property taxes are high
March 18, 2010
Click image to enlarge
Tax Policy Blog has the details.
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Happy St. Patricks Day!
March 17, 2010
Behave. Or be careful.
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The real dirty dozen tax scams
March 17, 2010
My new post at Going Concern. Hint: they're done to you, not by you.
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The Dirty Dozen
March 17, 2010
The IRS has come out with its "Dirty Dozen" list of tax scams. Return Preparer fraud tops the list -- a sly plug for their bid to increase their power over preparers. Other scams listed include:
Hiding Income OffshorePhishing
FIling Fals or Misleading Forms (duh!)
Nontaxable Social Security Benefits with Exaggerated Withholding Credit
Abuse of Charitable Organizations and Deductions
Frivolous Arguments
Abusive Retirement Plans
Disguised Corporate Ownership
Zero Wages
Misuse of Trusts
Fuel Tax Credit Scams
Falling for any of these scams could make your financial life miserable for years to come. Keep in mind the first rule for avoiding scam: if it sounds too good to be true, it probably is.
More coverage:
Also: These Are the Real Scams: The Dirty Dozen Tax Policy Scams
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Iowa tax credit haircut advances
March 17, 2010
The legislative Democrats' plan to trim Iowa's tax credits advanced out of committee this week. The tax committees in each house approved the bills, SSB 3250 and HSB 738, along party lines.
The main elements of the bills are:
- Halving the R&D credit for big companies
- Limiting the cap on certain business tax credits to $120 million, from the current $185 million
- Suspending the film credit for one year
- Setting up an "oversight committee" for tax expenditures, so when the next scandal comes around, they can say it was just an oversight.
As most of these credits are just government spending run through the tax return, they are a natural target when the state is low on cash. Still, the legislature isn't addressing the real issues: are the tax credits worth keeping at all? There's no evidence they do any good. Far better to scrap the credits, lower the rates, and let us keep our money without running it through the Department of Revenue first. Something like the Quick and Dirty Iowa Tax Reform Plan.
More coverage:
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That's OK, the press conference was worth the squandered millions
March 17, 2010
When politicians enact "economic development" tax breaks, their goal isn't to help the economy; it's to provide opportunities for press conferences to boast about the "new jobs." Once the press conference ends, so does their interest. David Brunori tells how this plays out in Massachussetts:
The Boston Globe in an excellent March 14 article reported that Massachusetts has given away hundreds of millions of dollars in state and local tax breaks to companies that created few or no jobs. Indeed, many of the recipients of the tax breaks actually moved jobs overseas or just laid workers off. For example, Nortel Networks received $2 million from the state and promised to add an additional 800 workers to its staff of 2,200. Today Nortel has 145 employees in the state but continues to enjoy the tax breaks.
That's why we shouldn't have been surprised that Iowa's film credit program was grossly mismanaged. The politicians wanted to meet starlets and have happy stories about the film crews they bribed to come here. It's no fun checking invoices to make sure the money isn't plundered.
UPDATE: More here.
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If you just make up tax return numbers, you can go to jail.
March 17, 2010
If New York does it, it's business as usual.
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Shooting the offshore jaywalkers
March 17, 2010
The Senate is about to pass a new offshore tax crackdown law. A key provision: penalties up to $50,000 for failure to report offshore accounts on 1040s, whether or or not any tax is due. Jack Townsend has the details.
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How many legs does a dog have?
March 17, 2010
My new post at IowaBiz.com covers the rules for making tax-free expense reimbursements.
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W&M chair: Retroactive estate tax reinstatement, 45% rate...
March 17, 2010
...and maybe an option of choosing between 2009 and 2010 tax law for estates of those dying this year.
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Lessons in non-profit governance
March 16, 2010
Note to members of non-profit boards: if your executives don't want you to talk with the outside auditors, that's a really, really bad sign.
Yet that's what happened at the Iowa Association of School Boards, the entity that runs Skills Iowa, "a special project by Sen. Tom Harkin," according to testimony by the outside auditor yesterday, as reported in the Des Moines Register:
Ted Lodden, who is with the association's accounting firm, Brooks Lodden, also testified at Monday's hearing.Lodden described a bizarre chain of events in which the association's top staffers, including Kilcrease, tried to prevent him from telling board members of his concerns with the agency's finances.
Lodden said employees repeatedly blocked his firm's access to the board last fall. He said he eventually bypassed the staff and contacted board members via e-mail, asking to meet with them. He then received what he called a "a very threatening letter" from an association lawyer demanding that he retract his request for a meeting.
Lodden called it "the strangest thing I've ever been through in my entire career."
Strange, indeed. Non-profit boards approve the hiring of accounting firms, and normally the audit report is reviewed with a board finance committee or audit committee. You'd almost think they were hiding something:
The organization's former chief financial officer is alleged to have used his association credit card to buy airline tickets for a vacation to Bora Bora. There are concerns that some of the association's affiliate businesses have lost millions of dollars in recent years.Last fall, Kilcrease and then-board President Jack Hill revised her employment contract to include additional compensation for payroll taxes deducted from her check. That raised her pay from $210,000 to $367,000.
Now the FBI is poking around because of the federal money that goes to the organization:
The association calls Skills Iowa "a special project by Sen. Tom Harkin." The project is led by association employee Susie Olesen, a longtime friend of Harkin who has an extensive background in education and curriculum development.Skills Iowa buys software from U.S. Skills, a software company run by Michael Perik of Rhode Island. Association officials say Skills Iowa has paid Perik's company at least $6.2 million since August 2007. Over the past 10 years, Perik has contributed more than $1 million to various Democratic Party campaign committees around the nation.
Any similarities to other organizations that paid outlandish salaries and bonuses to their executives while getting money from Senator Harkin's string-pulling are surely just coincidental.
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Film Credits: the video
March 16, 2010
Too bad this video from the Tax Foundation didn't get a tax credit:
Featuring Natasha Altamirano and a film-credit finagler who really needs to button that shirt.
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He's got them low-down GPS bracelet blues
March 16, 2010
A Minnesota bluesman awaiting sentencing on tax evasion avoided being locked up right away, but he won't be hard to find, reports StarTribune.com:
After a court hearing packed with his customers and employees, Steven M. Renner remained a free man Monday despite a federal prosecutor's efforts to have him locked up because of allegations that he ran a Ponzi scheme. He will be required to wear a GPS tracking device, U.S. District Judge Donovan Frank decided.
Why did The Man want him locked up right away?
On Feb. 19, agents of the U.S. Secret Service and FBI raided Renner's businesses, looking for evidence of what they said is a "suspected Ponzi scheme that is headquartered in Minneapolis and that is operating over the Internet." Agents also seized business accounts holding more than $24 million.
Not a bad stash for a bluesman.
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Gourmet Mini Cinnamon Rolls Tax Carnival!
March 16, 2010
It's almost St. Patricks Day! Technically, today is St. Meningaud's Day, but most taverns don't offer specials for him.
While you prepare to get your Irish on tomorrow, get yourself in shape at Kay Bell's new Carnival of Taxes!
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Can you deduct the value of your time donated to charity?
March 16, 2010
No way, no how, explains TaxGrrrl:
Nope, it doesn’t make a difference if you can value your services or not – the donation of personal services is never deductible as a charitable donation. I can value my services pretty easily since, in many instances, I charge by the hour as an attorney. But it doesn’t matter: the IRS will not allow you to assign a value to your time for the purposes of a donation.
Sometimes a good deed is truly its own reward.
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Cedar Rapids hates its citizens
March 16, 2010
From Radio Iowa:
The grace period for drivers caught on camera running a red light in Cedar Rapids ended Sunday, and they will now be looking at a fine of up to $100. Cedar Rapids police spokesperson, Cristy Hamblin says they been sending out warnings to drivers for the last 30 days to prepare drivers.
Is it about safety? Don't be silly:
Hamblin says they will be able to view the violation and then decide if they want to pay the ticket or appeal. Hamblin says they have seven more cameras that will be going up. The cameras are expected to bring in around $750,000. Red light cameras are also in use in Sioux City, Council Bluffs, Clive and Davenport.
So if you have to write a $100 check because you didn't quite stop before turning right on red at an empty intersection in Cedar Rapids, be sure to send a thank you next time you vote.
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Via The Beanwalker.
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Remember: stuff is due today!
March 15, 2010
Today is March 15. That means tax returns, or at least extensions, are due today for calendar year corporations. A few things to keep in mind:
- If you extend your return filing date to September 15, you get another six months to make your 2009 pension and profit sharing contributions.
- If you owe money with your tax return, you should have already arranged to pay it by EFTPS. If you haven't paid, get it in right now. You might be able to pay today at a bank using a Form 8109 coupon, if you have one, and if you can find a bank that still takes federal payments.
- If you owe but can't pay yet, you still should extend. The penalty for late payment is 1/2% of the amount due per month, plus interest, but the late filing penalty is 5% of the amount due per month plus interest.
- Even though S corporation returns typically have no tax due, you still need to file or extend them today. The tax law imposes a penalty of $89 per K-1, per month, for filing an S corporation return after the due date, including any extension. That means as S corporation with ten shareholders that files one day late has an $890 late filing penalties. That penalty goes up to $195 next year.
- If you can e-file your extension, do so. It's safer and it saves you a trip to the post office. If you must send your return or extension the old-fashioned way, be sure you use "Certified Mail, Return Receipt Requested," and hang on to that postmarked receipt like a family heirloom.
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You mean I might go to jail if I plead guilty to 20 federal charges?
March 15, 2010
A Cedar Rapids landlord who recently was convicted of tax evasion is having second thoughts about pleading guilty to defrauding insurance companies:
Landlord Robert Miell is now asking to withdraw his guilty pleas for 18 counts of mail fraud and two counts of perjury he made last year.He was also convicted by a jury in January 2009 for two counts of tax fraud and is to be sentenced June 7.
Miell has a new lawyer now, Alfredo Parrish of Des Moines, and the motion filed Thursday claims he had ineffective counsel and the court didn’t inform him of the penalties and restitution he faces.
He was charged with filing fraudulent hail damage claims. He owned over 400 rental properties in Eastern Iowa. The liquidation of his assets to cover his debts has begun.
In the unlikely event he gets his plea overturned, he still has to deal with that tax conviction.
Related:
They got Capone on tax charges. The Cedar Rapids Landlord, too.
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'Federal accountants, for example, perform work that has more complexity and requires more skill than accounting work in the private sector'
March 15, 2010
Yes, it's hard being an IRS agent. Just ask IRS Agent Mark E. Hunt:
An Internal Revenue Service officer and three other Maryland men have been accused of running a $1.2 million tax evasion scheme, according to an indictment unsealed in federal court in Greenbelt.Potomac attorney Irvin Catlett allegedly orchestrated the scheme. The indictment says he paid IRS Revenue Officer Mark E. Hunt to provide taxpayer information and pose as Catlett's "man on the inside" to convince clients that Catlett's tax shelter scheme was safe from prosecution.
The taxpayers naturally trusted Mr. Hunt because government employees are worth more -- just ask the head of the Treasury Empoyees union.
The hard work allegedly took a terrible toll on Mr. Hunt:
Hunt, prosecutors said, would display his IRS credentials during meetings with clients to assure them that he was an IRS employee who could protect them from the "inside."
Catlett has been charged with fraud, obstructing IRS laws, and 10 counts of aiding and assisting in the preparation of false tax returns. He faces up to 38 years in prison. Hunt faces up to 13 years in prison for fraud and lying to an IRS investigator when he allegedly denied accessing a taxpayer's account other than for official business. Cullum and Unterreiner face up to five years in prison on fraud charges.
Well, the threat of 13 years in prison would make most people want higher salary and benefits.
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Maybe they're just nuts
March 15, 2010
Some folks unwisely try to draw deep lessons from the behavior of lunatics. Tax lawyer Peter Pappas provides some needed perspective:
If you could rewind the lives of these people and view them on your DVD, you would find that they have long histories of blaming everyone but themselves for their problems.
Sometimes wacky behavior is just wacky behavior.
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Spring Thaw Cavalcade
March 15, 2010
The 100th running of the Cavalcade of Risk is up at Chatswood Consulting!
Always good stuff at the blog world's roundup of insurance and risk management posts, including InsureBlog's analysis of the tenuous links between health insurance and mortality, so slide on down and check out the party!
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Michigan is a strange state
March 13, 2010
At least it is based on this information from a taxpayer, as passed on by a colleague:
As an FYI... we have a client who filed their MI Business Tax return this summer and still has not received their refund.They called the MI department of Treasury and this is the answer they were given:
They claimed a non-refundable Credit on line 35 of the return. Returns with certain non-refundable credits have been flagged for review. However, they do not have procedures in place at this time to review the returns so they are waiting to see what to do with them.
No I did not make that up, that is the actual answer they were given. Their money is sitting in limbo while the MI department of revenue decides what procedures to put in place to review the non-refundable credits.
So, if you have anyone who has filed a MI Business Tax return and has not received their refund this may be the issue.
We also claimed an overpayment applied on the return and are unsure how that will be handled on their 2009 return.
Any of you Wolverines out there: are you running into this?
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Spending run through a tax return is still spending
March 12, 2010
Iowa's legislative Democrats have floated a proposal to cut back on state tax credit. Their effort, HSB 738, would lower the limits on some credits, suspend the scandal-ridden film credit, and form an oversight committee to ignore the credits until the next scandal monitor and evaluate the credits annually. Jason Clayworth reports:
The state’s film tax credit program would remain suspended for two years.The maximum amount that could be awarded on five popular credit programs that largely deal with job creation, film production and business research would be lowered from a total of $185 million to $120 million.
Cut Iowa’s tax credits in its venture capital, “Iowa Fund of Funds” program from $100 million to $60 million.
The state’s Economic Development Revolving Loan Program Tax Credit would be eliminated, which is a 20 percent tax credit used to encourage business growth.
Many other of the state’s more than two dozen tax credit programs would see an overall cut of 10 percent.
The public would be given more information on who, why and how much tax credits are spent.
Programs would be regularly reviewed for performance under a new “Tax Expenditure Committee” that would report to the legislature.
It's far short of the real solution, but at least they seem to realize there is a problem:
The more than two dozen tax credit programs on Iowa’s books will cost the state an estimated $525 million in the fiscal year that begins July 1, that up by 75 percent from the fiscal year that ended June 30, 2007.
For comparison, the entire corporation income tax is budgeted to net Iowa $165 million this fiscal year.
Unfortunately, some folks still don't get it:
Republicans – who were not part of a working group that drafted the bill – expressed concern. Reviews are necessary but some of the cuts could hurt business, they said. They accused Democrats of proposing a tax increase."Iowans are writing bigger tax checks and that’s a tax increase," said House Republican Leader Kraig Paulsen of Hiawatha.
Many of these credits are refundable, and others are transferable. When a credit is refundable, like the Iowa research credit, you can have a negative income tax - in other words, a subsidy. A reduced subsidy isn't a tax increase. When a credit is "transferable," a recipient who can't use it sells it. When a business does it, it's called "factoring receivables." The only difference from spending is that it is spending receivables rather than cash.
Unfortunately, refundable and transferable credits are set to remain in the system under this bill. The legislature isn't ready for the bold but necessary reforms, like the Quick and Dirty Iowa Tax Reform.
Other coverage:
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Don't give them any ideas
March 12, 2010
Subsidize them and they will come:
Sen. Herman Quirmbach, D-Ames, an Iowa State University economics professor, said he sees no way to fix the film tax credit under a suspension that would make it pay.“So many states have tried this in various ways and there seems to be broad-based failure,” he said. “I don’t know how we can succeed when so many others have failed.”
Elias said Iowa could become the surf board capital of the world if it pays 50 percent of the production costs like the Iowa Film Office initially was doing with its “half-price” filmmaking promotion that overcommitted state outlays estimated at up to $38.5 million.
Replace "surfboards" with "ethanol and windmills" and that pretty much describes Iowa's economic policy.
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Still futile after all these years
March 12, 2010
I'd think twice about getting tax advice from somebody whose web site looked like this:
Yet people still came to Carel Prater to buy quack advice about using the "Section 861 argument" that U.S.-source income is nontaxable. The injunction pictured above said Mr. Prater wasn't supposed to do that, and this week Mr. Prater was convicted of "corrupt interference with the Internal Revenue Laws, aiding and assisting the filing of a false tax return, failure to file a tax return, criminal contempt, structuring transactions to avoid reporting requirements, and making false declarations before a grand jury."
The "Section 861" argument is the same one used by Wesley Snipes, leading to his failure-to-file conviction that he is currently appealing.
Prior Tax Update Coverage: YOU KNOW YOU'VE HAD A BAD DAY (II)...
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Got options?
March 12, 2010
Here are "Ten Tax Tips For Stock Options," via Kay Bell.
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That check is taxable, whether or not you cash it.
March 11, 2010
An Illinois man got a $16,987 check for doing some subcontract work for a "long-time friend and colleage" in 2006. He got a 1099 that included the check, but he says he didn't get around to cashing it until after year end, so he left it off the return. The Tax Court yesterday said that didn't work:
Petitioner does not dispute the total amount of the compensation, but he does dispute that the final payment of $16,987 was received in 2006. Petitioner concedes that the check bore a December 2006 date but contends that he did not, and agreed not to, cash the check immediately...Petitioner provided no evidence beyond his own testimony of the purported agreement with MPC not to cash the check. He did not call his long-time friend and colleague or any other person as a witness to corroborate his testimony about the purported agreement. Petitioner agreed that there was no reason to believe the check would not be honored...
In conclusion, the Court finds that petitioner has not shown that there was an agreement not to cash the check in 2006 even though the check was received in 2006. Accordingly, petitioner received $16,987 in unreported nonemployee compensation in 2006, and respondent's determinations are sustained.
The Moral: If you get the check, you get to pay the tax.
Cite: Morgan, T.C. Summ. Op. 2010-29.
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Gronstal: forget coupling
March 11, 2010
It looks like Iowa isn't going to bother to couple with 2008 or 2009 changes in the federal tax law, reports the Quad City Times:
"It’s unlikely we’re going to find the ability to give up significant state revenue this year when we’re cutting every thing else in state government," Senate Majority Leader Mike Gronstal, D-Council Bluffs, said Wednesday.Not conforming Iowa’s tax code to federal changes in 2008 or 2009 amounts to a roughly $90 million issue over the two years, said Jim McNulty of the state Department of Revenue.
That means taxpayers will have to make extra adjustments from their federal return to compute their Iowa taxable income. These will include:
- No bonus depreciation
- The 2009 Section 179 deduction for Iowa will be limited to $133,000. The federal limit for this deduction for the cost of equimpment that would otherwise be capitalized and depreciated is $250,000. Iowa has conformed to the 2008 Section 179 limit.
- No $250 deduction for educator expenses. This will trigger lots of $17 deficiency notices for teachers. (1040 line 23)
- No deduction for higher education tuition and fees (1040 line 34)
- No deduction for the sales tax paid for a new car purchase.
- No exclusion for the first $2,400 of jobless benefits.
- No Schedule A deduction for state and local sales taxes.
- No retroactive 2009 deduction for contributions to charity for Haiti disaster relief paid between 1/1/2010 and 2/28/2010.
One more argument for the Quick and Dirty Iowa Tax Reform.
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Sure, let's have another round, put it on the grandkid's tab
March 11, 2010
The federal individual income tax is by far the largest source of operating revenue for the government. The Tax Foundation yesterday reported that we are moving ever closer to the point of no return, when only a minority pays income tax.
When you don't have to pay, you don't care so much about the bill.
Via The TaxProf.
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Dinero Rapido tiene problemas
March 11, 2010
Nothing throws cold water on a preparer in the middle of tax season like this:
The United States has sued a Garden City, Kan., tax preparer, Jose Lares, seeking to permanently bar him from the tax-preparation business, the Justice Department announced today. The civil injunction suit, filed with the U.S. District Court for the District of Kansas, alleges that Lares prepares returns through Dinero Rapido Tax Service, formerly known as Income Tax Dinero Rapido, in Garden City.According to the government’s complaint, Lares claims false dependent exemptions and false filing statuses on customers’ returns. The complaint alleges that Internal Revenue Service (IRS) audits of customers of Lares’s former company resulted in clients owing over $2 million. The complaint further states that IRS audits of customers of Lares’s current business, Dinero Rapido Tax Services, has revealed an average tax loss of over $6,000 per return.
To some customers, that might almost seem like an endorsement, except that Dinero Rapido's clients can expect an auditoria rapida from the IRS.
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It compensates for loss of the right to bear arms
March 11, 2010
Tax Policy Blog reports that Oregon offers a $50 tax credit "for the permanent loss of two limbs." It's part of a roundup of strange tax rules. No word on whether you can get partial credit for a temporary loss of a limb, or for losing only one.
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The free cheese isn't taxable either
March 11, 2010
The $250 "economic recovery payments" issued last year to social security recipients aren't taxable. TaxGrrrl explains.
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Your deduction may be Schedule C, or it may be nothing at all
March 10, 2010
One of the first things people figure out about tax returns is that deductions on Schedule C are better than deductions on Schedule A. A legitimate Schedule C deduction is fully-deductible whether you itemize or not, for regular taxes or alternative minimum tax. If the deduction is instead an "unreimbursed employee business expense," it is only deductible if you itemize, only to the extent your "miscellaneous" deductions exceed 2% of your adjusted gross income, and it isn't deductible at all in computing your AMT.
A Montana investment advisor, a Mr. Purdy, figured out the difference. He worked for Merrill Lynch, where he received a W-2 and filed his returns as an employee for three years. Relationships soured and he sued Merrill Lynch, eventually getting a $393,000 settlement, $120,000 of which went to his attorney.
The taxpayer deducted the attorney fees as a Schedule C deduction for a new investment advisory business he set up. The IRS had other views. The Tax Court this week came down on the side of the IRS:
In addition, the parties treated Mr. Purdy as an employee. The two agreements Mr. Purdy signed consistently mentioned his employment with Merrill. Merrill paid Mr. Purdy a salary, withheld Federal and State taxes, and issued Mr. Purdy a W-2 every year. Mr. Purdy received benefits of the kinds an employee would receive, including health insurance and a retirement plan. Mr. Purdy reported the wages he earned as an employee consistently each year he was working at Merrill and even reported the settlement award as wages despite having been fired. At no time did he report any self-employment income from Merrill. Moreover, he claimed unreimbursed employee business expenses while he was working at Merrill. Mr. Purdy's tax returns during his tenure at Merrill never included a Schedule C related to his financial adviser activities and instead included his expenses related to his advising as unreimbursed employee business expenses...Accordingly, we find that Mr. Purdy incurred these legal fees as an employee, not as an independent contractor, sole proprietor, or partner
This highlights a big problem that lawsuit winners often face. They are taxable on the whole lawsuit proceeds, but if the lawsuit arises from employment, the legal fees are a Schedule A deduction -- and if you have alternative minimum tax, that's often the same as non-deductible. After the lawyers and the IRS are done, the lawsuit winner may get the smallest cut of the awards. Moving the deduction to Schedule A cost Mr. Purdy about $42,000.
Cite: Purdy, T.C. Summ. Op. 2010-26.
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You don't need a go-between to pay your taxes
March 10, 2010
A California tax preparer steals from his clients in a way as lame as it is sleazy:
David Canales, 53, faces up to 25 years in prison at a sentencing hearing set for May 24. He was indicted on 18 counts of fraud and tax evasion in August 2009.Between 2001 and 2008, Canales told his clients at Executive Management Services they owed money to the Internal Revenue Service and/or California’s Franchise Tax Board. He told them to write the checks to the initials IRS or FTB, officials said.
Canales had bank accounts under the names of two companies he founded that used the initials IRS and FTB. Instead of routing the money — more than $1 million — to the appropriate agencies to satisfy his clients' taxes, Canales admitted he deposited the money into his accounts, officials said. He then either filed a false tax return showing his clients owed little or no money in taxes or failed to pay them, official said.
A legitimate preparer will either e-file your returns and use direct debit to the tax agenceies to pay your tax, or he will present you paper returns for you to mail. If the preparer insists on getting checks from you to submit to the tax agencies, that's not normal.
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If a tax plan really works, you don't have to hide your assets
March 10, 2010
When somebody tells you that a tax avoidance plan is legal at the same time he tells you how to hide your assets from the IRS, you might wonder: If this works, why do I need to hide my assets? Many people blow right by that logical dilemma, including this retired FBI agent:
Jan Lindsey, 67, of Henderson pleaded guilty before U.S. District Judge James C. Mahan to one count of felony tax evasion and is scheduled to be sentenced July 9.According to the plea agreement, Lindsey worked as an FBI agent for 26 years and retired from the agency in 1995. For the next 10 years, Lindsey worked for the FBI as a contractor performing background investigations. Prior to 1999, Lindsey timely filed tax returns with the IRS.
Beginning in 1999, Lindsey started using illegal tax avoidance methods to file his and his wife’s joint tax returns. Lindsey failed to timely file or pay federal income tax for the years 1999 through 2006, and committed various acts that were designed to hide his income and assets from the IRS. He placed assets in nominee names, presented or recorded fraudulent documents in an attempt to obtain lien and levy releases on his property, filed false returns after liabilities were assessed in an attempt to reduce or eliminate his unpaid liability, and presented frivolous financial or negotiable instruments to the Treasury Department in claimed payment of his outstanding tax liability.
If the only way a tax scheme works is if the IRS can't reach your assets, it doesn't really work.
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Because expensive pizza has fewer calories
March 10, 2010
U.S. researchers estimate that an 18 percent tax on pizza and soda can push down U.S. adults’ calorie intake enough to lower their average weight by 5 pounds (2 kg) per year.
Yes, without pizza, people would instinctively switch to carrots and mineral water, instead of, say, burgers and beer.
Via Peter Pappas.
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IRS will soon hang up on 2006 tax refunds
March 10, 2010
William Perez has a timely reminder:
Individuals have until April 15, 2010, to file an original or amended tax return for 2006 and receive a refund from that year. The IRS says it has about $1.3 billion in reserve for people who still need to file their 2006 returns.Additionally, taxpayers had a special one-time-only tax credit available to them in 2006. It was called the telephone excise tax refund. Basically this is a tax credit available to anyone who had telephone service, whether landline or mobile, and represents a refund of excise taxes that were ruled unconstitutional
More here.
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Film Credits: putting Hollywood before your kids.
March 09, 2010
Iowa's legislators may not be able to bring themselves to kill the scandal-ridden film tax credit program, reports the Quad City Times:
A three-member subcommittee of the Senate Ways and Means Committee will consider a bill this afternoon that was introduced by Sen. Herman Quirmbach, D-Ames, seeking to end the controversial tax credit program for film, television and video projects.However, full committee chairman, Sen. Joe Bolkcom, D-Iowa City, said he expects lawmakers will move to suspend rather than eliminate the program before the legislature adjourns.
"My judgment is that there will be an attempt that will get support to suspend the credit, either to a year from now or potentially for a longer period of time than that," Bolkcom said. "I think there’s more support to suspend than to completely kill the program."
Senator Quirmbach has pointed out that when you fund film credits, that money comes from somewhere:
"This last year, the (film) credits cost $38.6 million," he said. "For that kind of money, I could save the jobs of 1,000 teachers. You tell me what's more important to the future of Iowa: 1,000 teachers or having Meryl Streep come visit."
It's not just an academic question:
Elementary and high school teachers in Des Moines' schools would have more students in their classrooms next fall and youngsters in kindergarten through fifth grades would spend less time in art, music and physical education, under budget proposals unveiled Friday.The proposal calls for slashing an unprecedented $33 million from next year's budget and eliminates nearly 480 positions, most of them teachers.
The reductions affect every school and employee group, Superintendent Nancy Sebring said.
But think of what film credits can do for your state's culture:
Florida is considering changing its film and television tax credits to ban recipients from airing gay characters. That's right. The federal government is thinking about letting gays serve openly in the Marine Corps, but the state of Florida thinks there is something wrong with gays appearing on television. I guess anything with Ellen DeGeneres or Ru Paul is out.Current Florida law grants tax credits on productions considered "family friendly" - with no smoking, sex, nudity or profane language. Violence has been okay so far. Republican Rep. Stephen Precourt would increase the credit and expand the field of disqualified productions to those that include any "exhibit or implied act" of nontraditional family values and gratuitous violence. Precourt says that shows with gay characters would not be something he'd want "to invest public dollars in."
Surely our intrepid subsidized filmmakers wouldn't stoop so low as to sell out for a mess of pottage government cash? Well, the film industry is known for its integrity.
And think of the intangible economic benefits of the Louisiana film credits:
New Orleans Saints tight end Jeremy Shockey and former defensive lineman Charles Grant are suing ex-teammate Kevin Houser over investments worth hundreds of thousands of dollars tied to a now-defunct movie studio.Shockey and Grant paid for what they thought would be state movie industry tax credits returning $1.33 for each dollar they invested.
State officials say Wayne Read, the CEO of the bankrupt Louisiana Film Studios LLC, never applied for the credits and the money was never returned to investors.
Yes, who needs teachers? We can meet movie stars!
Related: Let them eat canapes
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Thanks for bringing home the tax money, Senator!
March 09, 2010
Tom Harkin was one of the best friends of CIETC, the so-called job training program that graduated three of its executives, including CEO Ramona Cunningham, to Club Fed on graft charges.
Now Senator Harkin has a new friend, reports the Des Moines Register:
Sen. Tom Harkin has secured millions of dollars in taxpayer money for an Iowa Association of School Boards program run by a longtime friend. The program has, in turn, spent millions with a company run by a major financial backer of the Democratic Party.
Funny how that works.
Overall, the program has received more than $40 million in federal grants, some of which were secured by Harkin, Iowa's Democratic senator.Throughout that time, there have been questions about the program's effectiveness and the no-bid contracts it used to pay for computer software.
Today, the school board association promotes Skills Iowa as "a special project by Sen. Tom Harkin." The program is led by Susie Olesen, a personal friend of Harkin who has an extensive background in education and curriculum development.
Senator Harkin likes special projects.
Ramona Cunningham and Senator Harkin at the dedication of the Harkin Learning Center at CIETC headquarters.
Like CIETC, the non-profit running this pet program is having a few management problems:
Two teams of auditors are going through records of the Iowa Association of School Boards. One of them is looking into allegations that:• Public money was used for a former executive's vacation to Bora Bora.
• Staffers not only kept board members in the dark about financial problems but actively misled them about a multimillion-dollar business deal.
• A for-profit company run by an association executive received $5 million from the organization.
In addition, the group's executive director has acknowledged collecting $59,000 in extra pay over the past eight months, but says she might have been "set up" by the association's chief financial officer. There are also allegations of conflicts of interest, nepotism, lax financial controls and inadequate board oversight.
It sure is good that Senator Harkin spends our money so wisely.
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Do 'Amazon laws' backfire?
March 09, 2010
They just might, reports the Tax Foundation:
As more states consider enacting so-called "Amazon tax" laws to force online retailers to collect sales taxes, a new Tax Foundation report cautions that such policies would not only fail to relieve short-term budget problems but also hurt long-term economic growth.Click here to read the new report, "Amazon Tax" Laws Signal Business Unfriendliness And Will Worsen Short-Term Budget Problems, Tax Foundation Special Report No. 176.
The key findings:
* Frustrated by their inability to impose tax collection obligations on companies with no substantial connection to their state, several states are considering the adoption of "Amazon" tax laws. Such laws currently exist in New York, Rhode Island, North Carolina, and Colorado.
* An Amazon tax law requires retailers that have contracts with "affiliates"-independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business-to collect the state's sales and use tax.
* Amazon taxes are unlikely to produce revenue in the near term. New York continues to face a lengthy legal constitutional challenge. Rhode Island has even seen a drop in income tax collections due to the law.
* Amazon taxes do not level the playing field between brick-and-mortar and Internet-based businesses because they require Internet-based businesses to track thousands of sales tax bases and rates while brick-and-mortar businesses need to track only one.
* Unconstitutionally expansive nexus standards like the Amazon tax undermine legal certainty, burden interstate commerce, and harm economic growth.
That won't stop revenue hungry states from trying more Amazon taxes.
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Will your NCAA pool winnings be taxable?
March 09, 2010
Gambling winnings are always taxable income, notes Stacie Clifford Kitts. You have to itemize to deduct losses, and some states don't allow losses at all.
Russ Fox is your go-to guy for your gambling tax issues.
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Unintended consequences of the offshore crackdown
March 08, 2010
International tax lawyer Phil Hodgen files a report from his recent trip to Asia that should give us pause to consider how we deal with taxes of our offshore taxpayers:
Here’s what I’m seeing from my meetings:§ U.S. expatriates who ran afoul of the IRS’s FBAR Crusade are grumpy. (Seriously, who can blame them? A normal person, living a normal life outside the U.S., owing in some cases a trivial amount of tax, and for that the IRS wants to throw massive penalties at them?)
§ U.S. expatriates who are not (yet) fully compliant in reporting the existence of offshore bank accounts have no interest in coming forward due to the uncertainty as to how they’ll be penalized, and the current harsh penalty regime. Anecdotal or a trendline indicating how the IRS has trained a whole set of otherwise law-abiding people to deliberately lie on their tax returns?
§ An increasing willingness to give up U.S. citizenship. One of my reasons for coming to Asia this time was to meet with people who are launching the expatriation process. Anecdotal or a trendline? And if it is a trendline, what is causing productive, high achieving people to cut all ties with the United States?
§ Bankers are hesitant to set up and administer trusts which have U.S. beneficiaries. Anything touching the United States has highly complex accounting and paperwork requirements. Anecdotal or trendline indicating that the cost of doing business in/with the United States is getting too high?
The penalty regime for offshore tax reporting shoots jaywalkers to deter real criminals. When missing a reporting deadline by one day triggers an automatic $10,000 penalty, the incentives are for a late filer to not file at all in hopes the IRS doesn't notice. When you shoot jaywalkers to deter fraudsters, the jaywalkers might as well become fraudsters. With people abandoning U.S. citizenship in rapidly increasing numbers, it's time to re-evaluate the penalty system.
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Well, it's the next logical step
March 08, 2010
"New Tax Credit to Incentivize Business to ‘Make Profit’" It's a parody so far, but the legislature's still in session.
Via Taxguru.net
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Deductions for cheerleading expenses?
March 08, 2010
TaxGrrrl says no, you can't deduct expenses for high-school cheerleading costs. In Iowa, though, you may be able to get a tax credit.
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Start me up
March 08, 2010
When you start a new business, you can't start taking deductions until the "start up" phase is over and the business begins. You can deduct up to $5,000 of the costs in the year business begins, and the rest over 15 years. Stacie Clifford Kitts explains.
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Dealing with preparers this time of year
March 08, 2010
As W-2s, 1099s and K-1s take longer to trickle in, tax season is becoming more and more a six-week slog. Kay Bell has some tips for dealing with harried preparers this time of year.
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Weekend roundup
March 08, 2010
The Tax Update was less lazy than usual over the weekend, putting up two posts:
Second-guessing is so much harder than doing the actual work, where I respond to a Treasury union boss's assertion that government employees deserve higher pay because their work is so darn hard.
The repeal that dares not speak its name, where I talk about problems of the Iowa corporation income tax, and why it should go away.
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Second-guessing is so much harder than doing the actual work
March 07, 2010
It's hard for Treasury employee union boss Colleen Kelley to top herself in the absurd statement department, but by golly, she's done it again:
Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available. These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis. ..."The data flip the conventional wisdom on its head," says Cato Institute budget analyst Chris Edwards, a critic of federal pay policy. "Federal workers make substantially more than private workers, not less, in addition to having a large advantage in benefits."
But National Treasury Employees Union President Colleen Kelley says the comparison is faulty because it "compares apples and oranges." Federal accountants, for example, perform work that has more complexity and requires more skill than accounting work in the private sector, she says...
That's why Ms. Kelley fought so hard to keep the IRS from raising the accounting coursework requirement for new agents from 24 credit hours to 30. Because their accounting work is just so much harder than it is for the rest of us.
Texas requires 30 upper division course credits to sit for the CPA exam -- 30 hours beyond the two principles classes you have to take just to qualify for the upper division courses. That's typical of state exam requirements. Of course, students who take the 150 course hours required to sit for the exam often go well beyond the 30 upper division hours required.
But while the government employees they get paid more, they get better benefits too:
These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis. ...
But remember, what the government people do with their 24 credit hours is harder, and so you should be happy to have your grandchildren pay extra taxes to cover their higher salaries and gilded benefits.
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Via the TaxProf.
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The repeal that dares not speak its name
March 06, 2010
We can talk about it in public now.
Last fall some participants at a a the tax policy committee of the Iowa Association of Business and Industry said repealing Iowa's corporate income tax was just too radical for even a business group to bring up. Now the idea has made it to the business pages of the Des Moines Register, and riots have yet to ensue. In fact, one of the candidates for Governor has embraced corporation tax repeal, and I understand that others are considering the idea.
While getting rid of Iowa's corporation tax is only one step in improving Iowa's awful business tax climate, it's a big step.
Why it makes sense.Right now Iowa has the highest stated corporate tax rate in the country. Even when you add in Iowa's partial deduction for federal taxes, Iowa still has the second highest rate. That's not exactly a welcome mat for businesses.
Defenders of the status quo fire back "but you don't mention single factor apportionment! And what about our 30-odd special economic development incentives?"
Any salesman will tell you that it's hard to close with somebody who's already hung up on you. A high rate can trigger that hang-up before Iowa's economic development shills can say "but." Even if they don't hang up, they'll learn that single-factor is no longer just an Iowa treat. Nine other states have adopted "single-factor," which allocates income of corporations based only on in-state sales, instead of the traditional three-factor formula that splits income among states based on sales, property and payroll. Single-factor + lower rates trumps single factor every time.
But what about our wonderful economic development incentives? We have 30-odd targeted tax credits to attract new businesses!
Businesses can see through that. They know that the money Iowa is using to try to bribe them into coming comes from businesses that are already here. They know that once they settle in, the state will use their tax money to lure and subsidize their competitors. When Iowa tries to pay other businesses to come here, it's like a guy who brings his wife's purse into a bar to buy drinks for the girls. The girls aren't impressed, and any he does pick up aren't worth much.
Taking the tax rate to zero simplifies things. "No corporate income tax" is a pitch they won't hang up on.
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Related: The Tax Update's Quick and Dirty Iowa Tax Reform.
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Musical Chairs
March 05, 2010
The Stark era of tax policy has ended before it really got going. Kay Bell reports that the committee mutinied against the borderline-crazy Fortney "Pete" Stark, so he handed the gavel to economically-illiterate Sandy Levin.
TaxGrrrl comments on the mad parliamentary skillz behind the dumping of Stark:
With a significant power shift like this, you’d think the Democrats would offer up some well-written statement to make us feel better. Something full of hope, something to inspire us, something that says that this was the right thing to do so that the House can get on with the important issues of the day. And yet, Rep. Pelosi offered up this gem:
Chairman Charlie Rangel has informed me of his request for a leave of absence from his duties and responsibilities as Chairman of the Committee on Ways and Means. I will honor his request.I commend Chairman Rangel for his decades of leadership on jobs, health care, and the most significant economic issues of the day.
Way to sound powerful there, Nancy.
The country is in the best of hands.
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Getting a medical reimbursement plan wrong
March 05, 2010
A farmer or small businessman can set up a medical reimbursement plan for family members, but the devil is in the details, as a Kansas farmer learned this week in Tax Court. Roger McEowen has posted an excellent rundown of these plans, many of which are set up by Agriplan/BIZPLAN.
Similar results are now available with less hassle and risk by setting up a health savings account with a high-deductible health insurance plan.
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That's crazy talk.
March 05, 2010
What wild fringe teabagger radical said this:
I am opposed to extremely high rates, because they produce little or no revenue, because they are bad for the country, and, finally, because they are wrong. We can not finance the country, we can not improve social conditions, through any system of injustice, even if we attempt to inflict it upon the rich. Those who suffer the most harm will be the poor. This country believes in prosperity. It is absurd to suppose that it is envious of those who are already prosperous. The wise and correct course to follow in taxation and all other economic legislation is not to destroy those who have already secured success but to create conditions under which every one will have a better chance to be successful.
Why, it was that crazy firebrand Calvin Coolidge in his 1923 inaugural address. He had won a term in his own right after assuming the Presidency on the death of Warren Harding. Mr. Harding had his problems, but at least he freed the thousands of political prisoners jailed by his viciously-racist predecessor. And yet to some ears Coolidge sounds like the radical.
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Run for the border
March 05, 2010
Today the Treasury Department published the names of individuals who renounced their United States citizenship (“expatriated”) during the quarter ending December 31, 2009. A total of 502 individuals expatriated. This is the highest quarterly number of individuals expatriating for many years. In fact, during that one quarter, there were more expatriations that in the combined previous seven quarters
He cites recent legislation increasing the time expatriates can spend in the U.S. as a reason for the jump.
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'You live by the tax credit. You die by the tax credit'
March 05, 2010
A Keokuk biodiesel built with hundreds of thousands of dollars in "green jobs" subsidies and tax credits -- all to harvest another tax credit -- sells for $55,000 at auction, giving State 29 a chance to explain how "green jobs" really work:
Gee, let's blame it on the nation's financial sector..... or the soybean market..... or the oil industry..... let's blame it on ANYTHING except what was really going on: a bunch of guys in small town Iowa who tried to exploit a Federal tax credit put there by politicians obsessed with "green jobs" and other nonsense.
If it can't live without a tax credit, it's not a business, it's a government program.
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'Tool allowance' is the right description, anyway.
March 04, 2010
A few years ago, the IRS put its foot down. Auto mechanics were being provided "tool allowances" without being required to turn in receipts for any tools they purchased. The IRS made it quite clear that without receipts, the entire "tool allowance" was taxable income that had darned well better be included in the mechanics' W-2 income.
Now a new "tool allowance" is in the news - the per-diems provided to our travelling Congresscritters. The Wall Street Journal reports:
When lawmakers travel overseas on official business they are given up to $250 a day in taxpayer funds to cover meals and expenses. Congressional rules say they must return any leftover cash to the government.They usually don't.
According to interviews with 20 current and former members of Congress, lawmakers use the excess cash for shopping or to defray spouses' travel expenses. Sometimes they give it away; sometimes they pocket it. Many lawmakers said they didn't know the rules demand repayment.
"If that was the policy, you could never get many members traveling," said Rep. Solomon Ortiz, a Texas Democrat. Mr. Ortiz said he had never returned any money.
Oh, they wouldn't travel? Too bad, so sad. We can be sure the money is spent for a good cause:
Rep. Joe Wilson (R., S.C.) said he once bought marble goblets in the Kabul airport as gifts for constituents. Rep. Mark Souder (R., Ind.) said he dipped into his funds to buy a $200 painting of an estuary in Turkey, which hung in his office for a while and was now in his house.
As important as it is to keep our leaders supplied with marble goblets, the tax law is pretty clear. Unless done under IRS per-diem rules, unaccountable travel allowances are taxable income, just like tool allowances -- even if the "tools" happen to be in Congress.
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Sorry, Charlie!!
March 04, 2010
So Charlie Rangel steps down from his rule of the Ways and Means Committee. Considering that committee's crucial taxwriting role, he needed to go; by not bothering to properly report his income for years, he didn't set much of an example. Still, he had some sensible policy ideas, particularly in the area of corporate taxes. We could do worse. And as his successor is Fortney "Pete" Stark, we almost certainly will.
More coverage:
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600 staffers on Capitol Hill are tax deadbeats
March 04, 2010
And that doesn't even count the Congresscritters.
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Heh.
March 04, 2010
"Good News: Free Tax Return Preparation; Bad News: You Have to Go to a Nets Game"
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Des Moines businessman 'responsible' for nearly $700,000 payroll taxes not remitted by his bookkeeper
March 03, 2010
Imagine how it feels to suddenly find out that your trusty bookkeeper has fallen three years behind on remitting payroll taxes for your business, and the IRS wants it now. That may have happened to Charles Colosimo, the owner of a Des Moines delivery business with 30 employees; now a federal judge has ruled that Mr. Colosimo is personally on the hook for back taxes of nearly $700,000.
Mr. Colosimo is stuck with the taxes even though the court found that his bookkeeper may have gotten him in trouble to begin with. The problem came to light when Mr. Colosimo asked his outside accountant to follow up on IRS notices looking for missing payroll tax returns. The judge said that once he got the bad news, the tax problems should have been his only priority:
It is undisputed that Colosimo knew of the unpaid taxes by June 4, 2004. It is also undisputed that between June 4, 2004 and Labor Day 2004, C&C Distribution disbursed funds totaling $902,084.99 to creditors other than the United States. C&C Distribution made further large payments to creditors other than the United States after that time. Under any view of the facts, Colosimo knew about these payments. This evidence is proof of willfulness as a matter of law.
Because he was considered a responsible person who "willfully" paid other creditors while owing the taxes, the judge says Mr. Colosimo is on the hook.
What could he have done differently? Here's a hint:
Colosimo’s role as president and treasurer was that of an overseer of the different components of C&C Distribution. Colosimo did not know the password to the EFTS system. Colosimo did not have the technical knowledge to pay the payroll taxes through the EFTS.
"EFTS" here means the Electronic Federal Tax Payment System, usually known as EFTPS. Taxpayers with EFTPS can go online to check the status of their payroll tax accounts.
It's too late for Mr. Colosimo, but it's not too late for you. Whether you use a payroll service or you do your payroll taxes in-house, learn how to go online to EFTPS; then check regularly to make sure your employment taxes are being paid. If you don't do so now, the IRS will make sure you do later.
Cite: Colosimo vs. United States, DC-SD Iowa, No. 4:08-CV-00397.
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Ohio man pleads guilty to tax charges and defrauding a Jefferson, Iowa hospital
March 03, 2010
Robert Alick apparently managed to rip off both the IRS and the Greene County Medical Center at the same time. The Chagrin Falls, Ohio resident pleaded guilty to five charges yesterday. From a Department of Justice press release:
According to the indictment and the plea agreement, Alick operated his used medical equipment sales business in Beachwood, Ohio, through the following entities: Healthcare Imaging Solutions Corporation, ECT Medical Systems Inc., ECT Corporation, Second Source Medical Equipment Corporation and Computer Remarketing Credit Corporation d/b/a DECT Imaging. Alick also admitted that he used this series of corporations both as part of his fraudulent scheme (described below) and to avoid paying taxes.According to the indictment and the plea agreement, Alick admitted that in connection to the mail and wire fraud counts, from July 2002 through April 2006, he engaged in a scheme to defraud the hospitals that were his customers through various means, including by taking substantial deposits that were supposed to be used to purchase medical equipment and failing to use such funds for the purchase of the equipment and failing to deliver the equipment, instead using the money on other things. Alick further admitted that he defrauded the following six hospitals: Toledo Hospital (Toledo, Ohio), Greene County Medical Center (Jefferson, Iowa), Canyon Surgery Center (Phoenix), North Suburban Surgery Center (Thorton, Colo.), Clarion Hospital (Clarion, Penn.) and Hugh Chatham Hospital (Elkin, N.C.).
He didn't cut the IRS in on the action, so he committed tax crimes in addition to the garden-variety theft. He also failed to remit employment taxes. Sentencing is scheduled for June.
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2006 refunds turn into pumpkins on April 15
March 03, 2010
Taxpayers have three years to file returns to claim refunds. The IRS is sitting on $1.3 billion in uncliamed taxes from 2006, according to a news release they issued yesterday. 12,200 Iowans have failed to claim estimated refunds of withheld or estimated taxes of nearly $10 million, according to the release.
If you don't get that 2006 return filed by April 15, 2010, you'll never see that money again. And while your at it, catch up on any other missing return years. You'll sleep better.
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IRS releases interest rates for 2nd quarter overpayments, underpayments
March 03, 2010
The IRS has released (Rev. Rul. 2010-9) the updated interest rates for amounts owed by and to the IRS for the three months begining October 1, 2009:
* four (4) percent for overpayments [three (3) percent in the case of a corporation];
* four (4) percent for underpayments;
* six (6) percent for large corporate underpayments; and
* one and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000.
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Taxing Kansans to lure and subsidize their competitors
March 03, 2010
The Kansas legislature has decided that abusing its current taxpayers to subsidize newcomers is the way over the rainbow:
The tax bill rewrites the rules for an incentive program created last year to encourage companies to move jobs from other states to Kansas. The program allows firms to keep 95 percent of the income taxes withheld from workers' paychecks for at least five years if they move at least five jobs to Kansas.Under the bill, nonprofit groups and even some federal government agencies would be eligible. Also, out-of-state companies would qualify if they bought Kansas companies and kept jobs in Kansas. The wages employers would have to pay to qualify also would be lower than is required now.
So existing businesses who have been paying taxes all along will get to compete with state-subsidized newcomers. That will grow the Kansas economy like using your wife's money to pick up girls at the bar will grow your marriage.
Hat Tip: David Brunori.
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How is reporting your income properly a 'tax dodge'?
March 02, 2010
Instapundit notes a Byron York story:
BYRON YORK: Treasury Nominee Profited From Offshore Tax Dodge. Nothing wrong with this — but kinda hypocritical given the Obama Administration’s posturing. Then again, tax hypocrisy from Treasury nominees seems de rigeur for this crowd . . . .
Nice headline, but it's a weak charge. From the York article:
Jeffrey Goldstein, the Obama administration's nominee to be the Treasury Department's Undersecretary for Domestic Finance, worked for a private equity fund that set up offshore shell corporations which allowed investors to avoid U.S. income tax, according to Senate Republican sources. The Senate Finance Committee is set to hold a hearing on Goldstein's nomination Tuesday.The firm for which Goldstein worked was Hellman & Friedman, and the shell corporations were located in the Cayman Islands. Goldstein, who was at Hellman & Friedman from 2004 to 2008, received income from the offshore investments -- money he was able to enjoy while paying a lower tax rate than most Americans pay on regular income. Goldstein earned what is called "carried interest," which is taxed at the lower capital gains rate rather than be taxed as regular income.
"Carried interests" have been a political football. These are "profits interests" earned by hedge fund an private equity managers. Carried interests work like this: the fund manager doesn't get an initial stake in investor money. If the fund doesn't grow, the manager gets nothing. If the fund does grow, the manager gets a "profits interest" percentage of all the income and capital gains and is taxed the same way as the investors on his cut. Populist politicians say the manager share of capital gains should be taxed as ordinary income, but the tax law is clear: the fund manager reports his share of fund capital gain as capital gain income, taxable at a 15% top rate, unless the law changes. So what's the problem?
The arrangements appear to have been legal, but in the past, prominent Democrats, including President Obama, have strongly criticized such tax-avoidance schemes. On the campaign trail, Obama often denounced "corporate loopholes and offshore tax havens," and last May, he unveiled a plan to reform "a tax code that makes it all too easy for a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all."
So it comes down to a charge of hypocrisy, or something like that. But think about it: what was he supposed to do? The guy got a K-1 from his hedge fund with instructions on how to report the income. Was he supposed to ignore that and report it all as ordinary income? If so, how? Was he supposed to call it self-employment income too? If he reported it differently from the K-1, he'd have to file Form 8082, which invites the IRS to investigate both him and the partnership.
Or was he supposed to report everything the way the K-1 said to, but then do an as-if computation to see what the tax would be under some carried interest tax proposal, and then write a check to the IRS for the additional as-if tax? If so, which carried interest proposal should he follow?
I have little sympathy for politicians, and I expect that Mr. Goldstein's defenders would make the same lame charges if the shoe were on the other foot. Still, as Tim Geithner's example shows, it's hard enough to get politicians to report their income properly. We shouldn't expect them to somehow go beyond that.
Related: TAX 'CARRIED INTERESTS' AS ORDINARY INCOME - BECAUSE PARTNERSHIP TAX LAW ISN'T HARD ENOUGH?
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It depends on whether you're a 'glass half-full' kind of reporter
March 02, 2010
One story, two headlines:
O. Kay Henderson: State tax collections down 6.5 percent
Rod Boshart: Iowa tax collections better than expected
The differences aren't just in the headlines. See if you can match the reporting with the reporter:
“That’s encouraging news,” said Sen. Bob Dvorsky, D-Coralville, chairman of the Senate Appropriations Committee. “I think that reflects what’s going on in the economy -- that it’s slowly doing a little better.”
and
“The U.S. is not bouncing back. Neither is Iowa bouncing back. Withholding was going to be down even without the deposit issue. Sales tax was going to be not very good at all, even without the deposit issue,” Robinson says. “Those two things are big drivers, but they aren’t terrible.”
Half-full or half-empty, the cash isn't coming in as fast as the politicians want to spend it.
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Dollars for dishwashers
March 02, 2010
Iowa burned through its allottment of fun bux to encourage purchases of "energy efficient" appliances in only a few hours yesterday. Our government supergeniuses, expecting the pile of our money to last two weeks, were again caught off guard again by the shocking phenomenon that people will line up for free money. Imagine that.
State 29 has more.
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The house always wins
March 02, 2010
Russ Fox has a handy list of states that disallow or limit gambling losses, even to the extent of winnings. Even if you like to play slots in Illinois, the taxes make it an even worse bet than usual.
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Things to think about before you 'buy the farm'
March 02, 2010
The keys to transitioning farm ownership to the next generation at Paul Neiffer's Farm CPA Today.
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Olympic Hangover Carnival of Taxes
March 02, 2010
Kay Bell celebrates the Games with a Winter Olympic-themed Carnival of Taxes.
Take a break from digging out from the snow and the tax season and check it out!
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Repealing the Iowa corporate income tax: just a good start
March 01, 2010
Sometimes I enjoy reading the paper:
Kristan, who writes a tax blog for Roth & Co., has a rationale for eliminating the tax. It goes like this: The corporate income tax is not a big income producer. It is expensive to administer. Also, Iowa's high tax rate discourages new businesses from locating in the state.So, why not get rid of it?
One reason, he admitted, is that too many businesses with highly paid lobbyists benefit from the complicated network of tax credits that has grown over the years to mitigate the cost of the tax.
Dave Elbert provided a nice overview of the problems with Iowa's coporation income tax. Yet while it's important to fix the corporation income tax (and by "fix" I mean "get rid of"), that's only a start. Iowa's income tax system has become a goofy means of half-backed industrial and social policy via tax returns. With dozens of tax credits and special breaks for everything from ethanol and soy-based transformer fluids to tuition funds and film credits, the tax law has ventured far from it's real job, funding state government. It is now a lobbyist's playground, with the influential getting funds at the expense of the rest of us.
That's why we need something like the Quick and Dirty Iowa Tax Plan. We'll reproduce the whole thing below. And consider: is it better to have low rates for everyone, or high rates and special deals for those favored by our 150 legislative supergeniuses?
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Aisle 17, the corporate welfare section
March 01, 2010
This is how the tax law gets to be awful:
Iowa grocers would have a new incentive for stocking Iowa grown foods under a bill filed by a Democratic lawmaker from Iowa City. Senator Joe Bolckom’s bill would enact a tax credit for stores which buy local fruits, vegetables, dairy products and meats. Bolckom says grocers want to support small local producers but it’s not always easy to do so.
Sen. Bolckom is a scourge of big-company corporate welfare, but he's just fine with it when his pet causes benefit. Maybe we could try another tack: let groceries decide what to stock without any input from the legislators. If they think there is a locavore market that needs to be met, they'll find a way, tax credits or not.
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Signature-only FBAR filers deadline moved back to June 30, 2011
March 01, 2010
The IRS has given people who have signature authority over foreign accounts, but no ownership interest, until June 30, 2011 to file FBAR reports (Form TD 90-22.1) for 2010 and prior years. The deadline had already been extended until June 30, 2010 for the prior years as part of the IRS offshore account amnesty.
It's moronic to require a payables clerk who can sign checks on the company's Canadian account to file FBAR reports, and it's even more moronic (moronicer?) to subject them to the horrible FBAR fines. Lets hope this additional extension is a step towards dropping the non-owner requirements entirely.
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Ice Age Cavalcade
March 01, 2010
There's a new Cavalcade of Risk up at Health Business Blog.
Always good stuff at the blog worlds insurance and risk-management roundup.
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They already do. It's called the lottery.
March 01, 2010
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Give taxpayers until April 15 to donate to charity for the prior tax year?
March 01, 2010
That's what Kay Bell suggests:
First, permanently shift the time frame for deductions. Allow taxpayers to deduct all qualified charitable gifts made by April 15 on their returns for the previous tax year.This would work the same way as IRA contributions. The IRS has been dealing with those for years, so simply adapting that system to donations shouldn't be a problem.
And as is the case with the temporary Haiti donation change, the tax year deduction choice would be optional. If a taxpayer wants to hold off claiming the donations until the next filing, that's fine.
I don't think it would work as well as Kay suggests. IRA trustees help monitor IRA contributions by year, and the annual cap on IRA contributions helps limit fraud opportunities (as do the rules restricting IRA deductions). These restraints don't exist for charitable deductions, and you would see a lot of deductions taken twice. Better to just leave the deadline at 12/31, and to write off the Haiti retroactive deduction as a one-time policy error.
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Taxes matter when you lose money
March 01, 2010
My new post at IowaBiz.com on why timely filing is extra important when your business is losing money.
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Yes, it is. Next question.
March 01, 2010
"Is Iowa A Corporate Welfare State?"
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Shrine of the Sneaky Senator
March 01, 2010
Most politicians think they are gods, but this might go a bit far even for them:
It is not unusual for members of Congress to arrange group rentals in Washington to share housing costs and, for some, underline their continuing “outsider” status. What is highly unusual, and unjustifiable, is the tax-exempt status as a religious institution enjoyed by a boarding house called the C Street Center that caters to conservative Christian lawmakers.The $1.8 million townhouse came to public notice last year when three recent tenants — Senator John Ensign; Mark Sanford, the South Carolina governor and former congressman; and former Representative Charles Pickering Jr. — were embroiled in marital infidelity scandals. Mr. Pickering was accused by his estranged wife of entertaining a mistress at the house.
Maybe John Edwards can get a membership.
Via the TaxProf.
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