Tax Update Blog: May 2010 Archives
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The S corporation medicare tax grab: what is to be done?
May 31, 2010
The tax blog world is aghast at the weird revenue grab from small S corporation professional practices contained in HR 4213. TaxGrrrl, Kay Bell, Robert D Flach, and Monica Lawver (UPDATE - Russ Fox, too) have all raised the alarm for this awful bill (and have kindly linked to the Tax Update while doing so).
But it will take more than being appalled to prevent the worst-designed tax rule since Sec.409A from becoming law. We need to contact our congresscritters, especially in the Senate, immediately. The Senate will take up the bill as soon as tomorrow. If you have a professional practice, call and e-mail your congresscritters early and often and let them know that your livelihood is more important to you than NASCAR and the rest of the "motorsports" industry. If you hire professionals, tell Congress that you don't want your local professionals to be discriminated against in favor of the big guys. The message is simple: The S corporation tax increase in HR 4213 is a mess and should not be enacted.
If you are in Iowa, call Senator Grassley at (202) 224-3744, Senator Harkin at (202) 224-3254, and your representative in the House. If you are another state, you can find your Senator's contact info here.
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Beautiful Des Moines Friday before a long weekend
May 28, 2010
Click image to enlarge.
The Belin Quartet plays at Nollen Plaza today during a delightful, wind-free lunch hour. I hope your long weekend is all this nice.
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How we blew this year's Roth & Company ad budget
May 28, 2010
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Extender bill extended to next month
May 28, 2010
Tax Analysts reports that the "extender" bill, which would whimisically hit some S corporations earnings with self-employment tax in a convoluted and difficult-to-administer way while taxing "carried interests" as ordinary income, won't pass the house until after Memorial Day ($link):
Democrats have made repeated attempts to pare down the cost of the bill. A manager's amendment offered late May 26 by acting House Ways and Means Committee Chair Sander M. Levin, D-Mich., would increase the deficit by $84.2 billion, about $50 billion less than the version of H.R. 4213 that House and Senate leaders unveiled last week.
If Mr. Levin is serious about reducing the cost of the bill, he can start with this list of extender pork provisions from Tax Policy Blog:
Click chart to enlarge.
But that would mean taking $3 billion from the impoverished beneficiaries of the low-income housing tax credit, or $11 million from the destitute NASCAR, or $634 million from the Grassley re-election campaign biodiesel producers.
Better still, they could just not pass the extender bill at all, and stop the "expiring provision" sham altogether. Congress could start to pass tax favors without the pretense that they will expire, and face up to their true cost honestly, or they could just lower rates for everybody. Fat chance of that.
More on the extender bill from Russ Fox and Monica Lawver.
UPDATE, 1:40 p.m.: House passes bill; Senate to take it up next week.
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Where can Wesley turn?
May 28, 2010
Wesley Snipes is having a run of bad luck in choosing his tax advisors. His tax advisor, who is already serving a ten-year sentence on tax charges, was just convicted of another batch of tax charges. Now his investment advisor has been charged with defrauding clients to the tune of $30 million.
Not all the bad drama in Mr. Snipes life is on the screen.
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As if Eddie Kahn didn't have enough trouble
May 27, 2010
Eddie Kahn had a starring role in Wesley Snipes' tax planning, but all he got for his trouble was a ten-year tenancy in the federal pen. Now it looks the feds will be extending his lease. From a Department of Justice Press Release:
Four promoters of a Florida-based business that sold fraudulent tax schemes were convicted today of selling worthless "bills of exchange" for the purpose of impeding the Internal Revenue Service (IRS) and promoting other schemes to orchestrate tax fraud, the Justice Department and IRS announced today. The evidence at trial showed that the four and their employees manufactured over $1 billion in fictitious financial instruments purporting to be drawn on the U.S. Treasury.Eddie Ray Kahn, Stephen C. Hunter, Danny True and Allan J. Tanguay, all of Florida, were found guilty after an 18-day trial. Jerry Williamson, who was charged in the same case, pleaded guilty in April of 2009 to one count of mail fraud for sending a fictitious bill of exchange purporting to be drawn on the U.S. Treasury. Chief Judge Royce Lamberth in Washington, who presided over the trial, set sentencing for August 30, 2010.
Mr. Snipes used the "bill of exchange" nonsense in the unwise tax planning that got hime a three-year sentence (currently under appeal) for failing to file tax returns.
All four men were convicted of conspiracy to defraud the United States and to commit mail fraud in the operation of American Rights Litigators/Guiding Light of God Ministries (ARL). In addition, each defendant was convicted of one or more counts of mail fraud. The evidence at trial showed that Kahn founded and ran ARL from 1996 through 2004. During that time, ARL enrolled more than 4,000 customers from all 50 states and the District of Columbia.
What sort of people paid good money for such bad advice? Quatloos explains the ARL market niche:
Eddie Kahn of "American Rights Litigators" represents the Hee-Haw contingent of the tax protestor movement...Eddie caters to the dumbest of the dumb, and his theories for not paying taxes are thus the dumbest of the dumb. Eddie has claimed variously that he can't find the Form 1040, that the IRS was not created by Congress and apparently just materialized out of the blue, that the IRS doesn't have the power to collect taxes, that the United States doesn't actually include the states, but is actually limited to the District of Columbia, that all the money collected from taxes goes to the International Monetary Fund (Eddie doesn't say who pays for our aircraft carriers, but what the hey), and that so long as keep out of the Social Security Program that you'll never have to file taxes... It seems that if somebody has tried a theory, lost, and then gone to jail than Eddie will then take it and advocate it as gospel.
While Mr. Kahn's theories may be the "dumbest of the dumb," they have something in common with all of the other tax protester theories, from "sovereign citizen" to "there is no law" -- they never work. It doesn't matter what your favorite "tax honesty" guru says about the federal tax. It's what the federal judges, federal marshals and federal prison wardens say that counts.
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Double-buzzed
May 27, 2010
Robert D. Flach has posted his weekly tax blog roundup, including two Tax Update posts. Nice of him.
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Why politicians don't apply truth-in-labeling laws to themselves
May 27, 2010
Howard Gleckman at TaxVox on the "extender" bill: How a Jobs-Creating, Loophole-Closing Tax Bill Does Little of Either
...there is something about the joint Ways & Means/ Senate Finance Committee bill’s Orwellian title: “The American Jobs and Closing Tax Loopholes Act" (AJACTLA) that makes it impossible to ignore.It isn’t just the fingernails-on-the-blackboard grammar that drives me crazy. It’s the idea that a bill that would do so little to create jobs or close loopholes—and would in reality continue so many special interest tax breaks—would be so hideously mislabeled. The bill would extend, count ‘em, 70 expiring subsidies at a cost of $28.5 billion over the next two years. There is little or no evidence that any of these goodies have ever created jobs, and thus it is unreasonable to believe they will produce any in the future—or that their long-postponed deaths would cost jobs.
But it is for critical infrastructure projects! Like:
It is, for instance, hard to see how continuing to allow generous tax depreciation for NASCAR racetracks will create many jobs. It is easier, however, to imagine how this will continue a windfall for the track owners. It is similarly hard to see how the national economy benefits from special tax-exempt bonds for investments in New York City’s "liberty zone."
If the "liberty zone" break, first enacted in the wake of the 9/11 attacks, hasn't restored New York City yet, it's pretty safe to say that it never will.
While Mr. Gleckman glosses over the gross ineptitude and stupidity in the bills' attack on professional S corporations, his post is full of tax policy wisdom.
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Can you sell your business without paying Iowa tax on capital gains?
May 27, 2010
My new post at IowaBiz.com covers Iowa's "10 and 10" exclusion.
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Reputation and skill
May 26, 2010
It's hard to do something exceptionally stupid to a tax code already brim-full of dumb, but Sander Levin, Charlie Rangel's replacement as head of the House Ways and Means Committee, is up to the job. Exhibit A: his new proposal to apply self-employment tax to some -- but only some -- professional S corporations.
Mr. Levin's proposal, part of the annual-or-more-frequent "extenders" bill, would hit K-1 earnings of S corporation shareholders with self-employment tax under two sets of circumstances:
- When the S corporations are members of a professional services partnership, and
- When the S corporation provides personal services and "the principal asset of such business is the reputation and skill of 3 or fewer employees."
Complex attribution rules would keep people from shifting income to other family members by gifting them stock.
If enacted, as seems likely, this rule would create odd problems.
It would penalize the smallest personal service providers to the benefit of their larger competitors.. A sole proprietorship would pay taxes at a rate at least 2.9% higher than a competitor whose "principal asset" is the reputation of more than three employees.
The bill also will require businesses and the IRS to determine what the "principal asset" of a personal service corporation is. The bill obviously requires the valuation of intangible assets -- reputation and skill -- but in a way not elsewhere attempted in the tax law. How do you do this?
Let's take an entirely hypothetical S corporation CPA firm with nine shareholders. All have been practicing in tax or audit work since they had hair. They like to think they are all highly skilled, but the skill sets differ. Some are known more as rainmakers, some view themselves more as technicians. One has an enormous Google footprint, while others are more old-school in their business development methods. Which counts more?
How often would you have to measure "skill and reputation"? In 1986, the last major rewrite of the Code drastically and suddenly reduced the "skill" of many old accountants by making their knowledge obsolete. The spread of computers greatly devalued the lovely handwriting of manual spreadsheet jockeys, enabling the graphically-challenged among us to do pretty spreadsheets with the best of them. How do you design an 1120-S schedule to measure that? Or would you just look at the name -- is Ernst and Young based on the reputation of Ernst, Ernst and Young?
Why can't you game the "principal asset" thing? Many accounting and law firms own their own building. If you own a building in your little S corporation, especially one big enough to generate rent from other tenants, it seems like that, rather than your "skill and reputation," could become your "principal" asset. The bill might just turn a bunch of small professional businesses into real-estate speculators.
And what skills do you measure? In my younger days in another firm, one of the (now deceased) partners was known around the office for his amazing ability to bill clients seemingly impossible amounts and make them think they were getting a bargain -- a valuable skill, certainly, if one not fully appreciated by his clients. How does the IRS measure this? Sadly, this is the sort of dark skill common among congresscritters like Mr. Levin, offsetting their apparent absence of skills in sound tax policy.
UPDATE, 5/31/2010: The S corporation medicare tax grab: what is to be done?
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IRS Releases 2011 HSA limits
May 25, 2010
While the Obama administration is waging war against health savings accounts, they're not dead yet. The IRS has issued the 2011 contribution limits for health savings accounts: $3,050 for single plans and $6,150 for family plans. These are the same limits as applied for 2010.
You have to have a "high deductible" plan to qualify to make an HSA contribution. That's a plan with an annual deductible of at least $1,200 for single plans and $2,400 for family coverage. The plans can't have annual out-of-pocket expenses (besides premiums) in excess of $5,950 for single coverage and $11,900 for family coverage.
Link: IRS Publication 969 on HSAs.
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Another cost of insane tax credits
May 25, 2010
Though it is finally dead, the recently expired first-time homebuyer credit continues to do its little part to undermine our already rotten tax administration system. Kay Bell reports:
Note [Taxpayer Advocate Nina] Olson's conclusion: "…it is likely that FTHBC examinations will displace a significant additional number of regular discretionary audits before the year is through."That means return entries that IRS examiners might have looked at more closely in prior filing seasons are getting passed over as they focus their limited resources on the more detailed homebuyer credit claims.
So not only did you help pay $8,000 for somebody else to buy a house, the IRS resources devoted to prevent abuse of an already-abusive subsidy will make it easier for your neighborhood tax cheat to fly under the IRS radar. It shows in real life how an insane ($40,000-$96,000 cost per additional home purchase) subsidy run through the tax code does its little part to bring the whole system to the verge of collapse.
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You could find an Iowan to do that without a tax credit
May 25, 2010
The producers of MacGruber, a full-length movie based on a lame Saturday NIght LIve skip, are happy to take taxpayer funds for filming their masterwork in New Mexico, but they were unwilling to sacrifice artistic integrity. They went without a tax credit for the hairstylist needed to maintain the star's mullet.
Flickr image by raveller under Creative Commons license.
That's one area of filmmaking where Iowa has a natural competitive advantage, tax credit or no.
The Tax Policy Blog has more.
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Former tax policy chief: tax system "nearing collapse"
May 24, 2010
The indiscrimanate use of the tax law as the Swiss Army Knife of public policy is bringing the tax system to the point of collapse, according to a wise and sobering speech from Pamela F. Olson, a former Treasury assistant secretary for tax policy, reprinted by Tax Analysts ($link):
Our income tax system began as a system intended simply to fund the operations of government. Over the years, however, successive Congresses and administrations have proposed and enacted both minor changes and major overhauls. We have grafted on more and more components to the point that the system is nearing collapse.
How did we get there?
Congress decided to administer all manner of benefits through the tax code decades ago, but it has become particularly popular to do so in the last 15 years. Somewhere in the 1990s Republicans realized they could enact promised tax cuts with targeted provisions in the tax code, and Democrats realized they could enact promised spending programs with targeted provisions in the tax code.
Note to small-government types: spending run through a 1040 is still spending.
Judging from the number of new deductions, exclusions, and credits enacted or proposed to be enacted, Congress doesn't seem inclined to change its ways. That is unfortunate, because the tax code is a poor delivery vehicle for tuition tax breaks that can't be delivered until long after the tuition check is written, for income support paid on the basis of last year's annual income, or for healthcare for those without employer-provided coverage. It is also a poor delivery mechanism because it fails to provide an incentive for many at the bottom of the income ladder who pay home mortgage interest but cannot deduct the interest, who set aside money in savings accounts but do not qualify for the savers credit, whose employers don't provide a retirement savings plan.
That's why politicians who brag about "cutting taxes" when they are really running their spending through the tax code are lying.
When it comes to taxes, we have done exactly the opposite of what the business world has done to increase productivity -- a key to the economic growth our county has enjoyed. What is it the business world has done to increase productivity? It has simplified. It has taken every process down to its constituent parts and cut out the inefficiencies, the points of friction, the drags that prevent the most streamlined operation and the standardization of transactions. In the tax world, instead of simplifying to increase productivity in compliance and administration, we keep adding complexity -- more rules, more limitations, more terms, more conditions, more qualifiers, more provisos, and more exceptions. The result is that our system gets slower and slower and more inefficient.
She doesn't say this, but I will: it's insane to put the IRS in charge of national health policy when it's already about to collapse with it's existing responsibilities. Meanwhile, the current IRS Commissioner thinks an agency that can barely handle its current workload needs to take on a massive new preparer regulation project.
As if to prove her point, House taxwriters released their new "extenders" legislation last week. These bills annually increase tax law complexity by enacting permant tax increases to fund allegedly temporary targeted tax breaks. TaxGrrrl Kelly Erb notes of the current extender bill:
Next, the length. When I plowed through it earlier today, the version was a remarkable 433 pages (the officially summary alone is 27 pages)....
I’m not alone in my concern over the scope of this bill and what it means for our economy. We keep pushing a little bit at the edges of some pretty sweeping changes at an alarming speed – so fast, in fact, that many taxpayers haven’t had time to digest them, much less, react to them. Bits and pieces (like this one) are just now coming out about laws passed months ago.
Have Pamela Olson and TaxGrrrl ever been seen together?
Related: Let's give the IRS more to do! Oh, wait...
Flickr image of "The ultimate Swiss Army Knife" by redjar under Creative Commons license
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Judge: Harold Hill doesn't have to tell us how he's spending our money
May 24, 2010
A Polk County judge last week ruled that film producers don't have to disclose how they use their taxpayer subsidies from the Iowa film credits. From The Des Moines Register:
The producers filed the lawsuit in the wake of an open-records request by The Des Moines Register last fall to Iowa's Department of Economic Development. Judge Artis Reis decided the producers would suffer "incalculable" financial harm if the state released budget forms completed by filmmakers that it previously indicated could be kept confidential."How can the state of Iowa expect to attract new businesses if the businesses cannot rely on the state's word to keep confidential information which, if released, could harm the businesses?" Reis wrote in her ruling. "Public curiosity cannot override the public interest in continuing economic development for the state."
I have no idea whether the judge got the law right, but she definitely botched the economics. She assumes that there is an actual economic benefit to the state from taking money from you and me and giving it to Hollywood. That's absurd.
As a policy matter, there's no justification for subsidizing private businesses, let alone for doing it with no accountability. The film industry sure hasn't earned the benefit of the doubt. Here's just one example of how much we can trust Hollywood, from the film scandal accountants report:
Organizations were contracted by production companies to provide advertising for the films, often referred to as "sponsorships". In return, the sponsoring organization would generally receive advertising from the production company in the film or on merchandise related to the production. In these situations, no cash was exchanged, but the amount was included as an Iowa qualifying expenditure. In certain productions, we identified this situation multiple times, with some amounts exceeding $1,000,000 for each sponsorship.A specific production had 4 sponsorships at $1,250,000 each, totaling more than 75% of the total qualifying expenditures. We were able to identify a total of 12 sponsorships exceeding $1,000,000 or more for each sponsorship, all of which were listed as qualifying Iowa expenditures totaling $13,400,000.
Millions of taxpayer dollars to buy lines on the credit roll -- that's the "economic development" that Judge Reis is protecting.
Related: Film Credits: putting Hollywood before your kids.
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I lied to the IRS, but I'm being honest with you!
May 24, 2010
One of the hidden dangers of business tax evasion is that you might want to sell the business someday. It can be awkward to explain to a buyer that even though your tax returns show you've barely been scraping by, the business is really a gold mine. Honest!
Russ Fox reports on a new danger for business tax evaders:
I was at the annual SuperSeminar a couple of weeks ago. Bob McKenzie, one of the presenters, mentioned that the IRS has found that sending undercover agents to businesses that are for sale has been a very useful strategy. Mr. McKenzie told the story of the sale of a Chicago pub, where the owner maintained two sets of books. The pub owner told a prospective buyer not to worry that the pub had only been slightly profitable; the true books showed the real profits. That prospective buyer happened to be an undercover officer from the IRS criminal investigations unit. Oops….
The tax-evading business seller has the exact same motivation to lie to the buyer as he does to the IRS: money. Most buyers can figure that out, which is likely to reduce the ultimate sale price of the business. If the "buyer" is the IRS, and the seller is exaggerating his businesses profits after lowballing them on the tax return, expect the IRS to go with the higher set of wrong numbers.
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Insert your 'professional courtesy' joke here
May 24, 2010
Chronicle of Higher Education, as quoted by the TaxProf:
[A]t the Stetson University College of Law [graduation ceremony], ...students were on the stage, presenting the class gift, when a ripple of activity passed through the faculty section. A snake was slithering through their midst, between, under, and — in some cases — over their feet. No one screamed, ... but a few professors were frightened.
Are they sure it wasn't there recruiting?
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And you thought taxes were complicated
May 21, 2010
While the tax law certainly is a puzzler, it may be simpler than the home life of an Ohio man now on trial for tax evasion charges. The cast of characters:
Thomas Parenteau, "a central Ohio luxury-home builder charged with bank and wire fraud, tax conspiracy, money laundering, witness tampering and obstruction of justice."
Marsha Parenteau, Mr. Parenteau's wife and a real estate broker in partnership with...
Pamela McCarty, Mr. Parenteau's mistress, mother of two of his children, and now prosecution witness in his federal tax evasion trial. From The Columbus Dispatch:
McCarty said she plotted with Parenteau, his wife and his accountant to cover up their crimes and lie in court after the IRS launched an investigation into her tax returns in 2005. She said the returns were fraudulently prepared to generate large refunds that the Parenteaus used to support fraudulent loan applications.McCarty said she decided to cooperate with the government after admitting herself to a Gahanna treatment facility in June 2008 to deal with alcoholism and emotional problems. When she returned home, she said Parenteau screamed at her, threatened her life and threw her against a wall in the mansion they shared at 4500 Dublin Rd.
"Mansion they shared"? What did Marsha have to say?
Although Parenteau fathered McCarty's two daughters, who were born in 2002 and 2004, he remained married and in business with his wife, Marsha. The Parenteaus obtained the 30,000-square-foot mansion on Dublin Road, in Norwich Township near Hilliard, in 2003 for $1.8 million through a trust, with McCarty as the trustee. At various times, Parenteau shared the house with both women.
Well, that is a big house. Heck, you probably would hardly be able to tell that your husband's girlfriend lived there with her kids.
The mansion was central to many of the fraudulent tax and loan schemes, which McCarty testified about as government lawyers displayed supporting documents on screens in the courtroom. Prosecutors say the Parenteaus obtained a combined $18 million in fraudulent loans against the property in 2004 and 2007.Despite her income, McCarty said Parenteau devised a scheme to create a fake business for her that showed large losses on her income-tax returns, resulting in $858,000 in refunds from 2000 to 2003. After she was fired by Dominion in late 2003, she said Parenteau created a false job for her, complete with fabricated paychecks and pay stubs, for use in qualifying for loans.
Mr. Parenteau is defending himself without aid of a lawyer. If you can keep your girlfriend in the same house as your wife, maybe it leads to delusions of invincibility.
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A 1099 for swapping services?
May 21, 2010
TaxGrrrl explains the sometimes surprising consequences when two businesses trade services instead of cash (hint: it's much like using cash).
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Using the house in Bermuda that Daddy put in that fancy offshore trust?
May 21, 2010
Phil Hodgen explains how the use of property held in an offshore trust can be taxable income, even if no cash is received, under newly-enacted tax rules.
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You can't avoid penalties by relying on weasels
May 21, 2010
Many investors in exploded tax shelters of the late 1990s and early 2000s have found themselves subject not only to back taxes, but also to stiff penalties for taking unreasonable tax return positions. Jack Townsend, a criminal defense tax attorney, gives some insight as to why by reporting on a judge's opinion that rips two big law firms:
There were two principal law firms involved in issuing the Egan opinions that would, the parties hoped, give the taxpayers risk-free access to the audit lottery for which they charged large premium fees (sort of like the driver of the get away car for a bank robbery charging a lot more than a tax driver would charge).
The judge on the opinion letters:
The authors of the opinion letters knew that it was not likely that the Fidelity High Tech or Fidelity International transaction would survive a legal challenge in which all the underlying facts were made known...The purpose of the opinion letters was not to provide legal guidance, but to provide a potential defense against the imposition of penalties, and thus to induce the taxpayer/Investor to enter into the transaction.
It's long, but worth reading in full.
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Traded on the Chicago Board of Betrayal
May 21, 2010
Markets in everything, as reported in the New York Times:
Hedge funds have found a new market to invest in: whistle-blowers.Informants who turn in tax cheats have to wait years to get their share of any reward from the IRS’s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. They are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.
The surging size of the potential awards is driving all the interest. Three years ago, the IRS began offering bigger rewards — 15% to 30% of whatever money the government recovered — in a move that has turbocharged the agency’s whistle-blower program.
The first such deal is a result of a predictable dynamic: It can take years to settle an IRS exam, and for some reason it's hard for whistleblowers to find work, so they have a reason to sell the possibility of a big reward at a discount to put beans on the table.
If you can hedge them, you can short them, so it should be interesting. As it's all ordinary income anyway, the new tax on carried interest won't hurt them.
Via the TaxProf
Related: A nation of Pavel Morozovs
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'Don’t Get Too Anxious to Stuff Just Anything into Your IRA '
May 20, 2010
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Ways and Means extender bill hits carried interests, professional S corporations
May 20, 2010
A summary of newest version of the annual lobbyist shakedown, a/k/a the expiring tax provision extension, has been released by the House Ways and Means Committee. To pay for a one-year renewal of the usual expiring corporate welfare provisions (Biodiesel!), the bill would impose permanent tax increases on some professional s corporations. It would also turn much capital gain to hedge fund and private equity partners into ordinary income.
The S corporation tax imposes self-employment tax on S corporation professional activity K-1 income. Under current law K-1 income from professional practices is not subject to self-employment tax, but the IRS often moves K-1 income to owner W-2s and then assesses FICA and Medicare taxes. The attacks the "John Edwards Shelter," but not in all cases. From the Ways and Means summary:
The bill would address this abuse in situations where (1) an S corporation is engaged in a professional service business that is principally based on the reputation and skill of 3 or fewer individuals or (2) an S corporation that is a partner in a professional service business.
We'll have to see the bill language to see what "based on the reputation and skill of 3 or fewer individuals" means. As a shareholder in a nine-shareholder CPA firm, I am suddenly moved to be modest about my own role, at least until bonus time.
The bill zaps hedge funds as follows:
Taxation of carried interest. The bill would prevent investment fund managers from paying taxes at capital gains rates on investment management services income received as carried interest in an investment fund. To the extent that carried interest reflects a return on invested capital, the bill would continue to tax carried interest at capital gain tax rates. However, to the extent that carried interest does not reflect a return on invested capital, the bill would require investment fund managers to treat seventy-five percent (75%) of the remaining carried interest as ordinary income. A transition rule would apply prior to January 1, 2013. This proposal is currently being estimated by the Joint Committee on Taxation.
Presumably this will be based on the carried interest provisions in Sec. 602 of HR 4213, as passed by the House earlier this year, which does little to grandfather existing hedge funds and private equity funds.
I hope to see statutory language by tomorrow.
Kay Bell has more on the extender bill.
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Tell us how you really feel
May 20, 2010
Jack Townsend, a criminal defense tax attorney, seems to think the taxpayer fared poorly in a recent Son-of-Boss tax shelter case:
Judge Finds Ambassador's Tax Shelter Transactions Bull**** (Actually Worse Than That)
He summarized this nicely:
The taxpayers involved (when the drill down on the partnerships is made) were Richard and Maureen Egan. Richard Egan was former Ambassador to Ireland. He and his wife made too much money. He and his wife did not like to pay tax. They entered phony transactions to shelter large gains. They did not pay the tax. They tried to hide their activity from the IRS. They were caught. His estate and his wife will have to pay the tax, interest on the tax, apparently the accuracy related penalties, and interest on the accuracy related penalties.
But the litigation goes on in hopes that sooner or later one of the appeals courts will accept these deals.
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IRS issues June 2010 Applicable Federal Rates (AFRs)
May 19, 2010
The IRS has issued (Rev. Rul. 2010-15) the minimum required interest rates for loans made in June 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.74%
-Mid-Term (loans from 3-9 years): 2.72%
-Long-Term (over 9 years): 4.30%
The Long-term tax-exempt rate for Section 382 ownership changes in May 2010 is 4.01%.
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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Oh, THAT $658,447
May 19, 2010
Anybody can make a mistake. Take the Texas man who filed a 2005 tax return reporting $7,012 income from doing landscape work, with no tax due. Unfortunately, he forgot one detail: he also sold stock in 2005 for $658,447, resulting in a $512,086 capital gain.
Things progressed to Tax Court, where Tex fell back on the venerable "blame the preparer" defense. The Tax Court explored what Tex actually told the pereparer, a Ms. Coley:
At the time of trial, petitioner testified that he discussed the stock sales with Coley as follows:
Q On your petition, it did not state that you received advice from her that the sale of stock was nontaxable?A No. She didn't tell me that.
Q Ms. Coley did not tell you that the sale of stock was nontaxable?
A Well, we had the conversation about stock.
That's -- I asked her, since I sold the stock and I repurchased it, since I never took the money, am I going to be required to pay taxes on it? She told me she didn't think so.
He acknowledged that he had never told the IRS during the examination or respondent's counsel after the petition was filed that he had spoken to Coley about the stock sales. We conclude that this claim is an afterthought, implausible, and not credible.
The Tax Court imposed penalties on Tex for failing to report the gain.
The Moral: There is no "wash sale" rule for stock gains. While wash sale rules disallow stock losses if you buy the stock back within 30 days before or after the loss sale, you normally can't undo gains. Oh, and if you omit 98.6% of your gross income from your 1040, don't expect to pin the whole blame on your preparer.
Cite: Carter, T.C. Memo. 2010-111
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Estate tax deal? Not so fast
May 19, 2010
Apparently the story we mentioned yesterday about an estate tax deal was premature. Tax Analysts reports today ($link):
Senate Finance Committee Chair Max Baucus, D-Mont., on May 18 denied that he has reached consensus with Republican taxwriters on extending the estate tax."There's no agreement on the estate tax on either the substance or process. None whatsoever," Baucus told reporters.
Baucus's comments came a day after Finance Committee member John Kyl, R-Ariz., said he and Baucus had agreed to extend the estate tax at a 35 percent top rate and a $5 million exemption level, indexed for inflation.
Well, Congress has been botching the estate tax for almost ten years now; why should they start getting anything right now?
UPDATE: More from The TaxProf and Going Concern.
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Do the kids there still respect the college dean?
May 19, 2010
Maybe in Muskogee, but not so much in Louisville:
Former UofL dean sentenced to 63 months in prison for tax evasion, embezzling
From the story:
Robert Felner was sentenced Monday to more than five years behind bars. The judge in the case went along with the recommended sentence, which means that Felner will be spending five years and three months behind bars and will have to pay back more than $2 million that he admitted he stole from three different institutions.
Among the ill-gotten gains was a stolen $510,000 "No Child Left Behind" grant. It's good to see how well federal education spending works out.
If you don't get the headline (whippersnapper!), Merle Haggard will explain:
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What do foreign trusts have to do with stimulus?
May 19, 2010
Phil Hodgen explains:
The astonishing largesse of the Federal government will apparently be paid for entirely by chasing Americans who have money outside the United States.
OK, not entirely -- but there is a pattern of shortsighted thinking:
The effect of the tax legislation is to make it uneconomic for U.S. citizens to use foreign trusts in their routine estate planning. More perniciously, the new tax legislation makes it uneconomic for non-U.S. banks to take on U.S. citizens as customers, because U.S. tax enforcement — as a job — continues to be outsourced by the government without compensation
I guess we want all of those evil but high-paying financiers to work in Singapore or something. Read Phil's whole post for the dirty details on the new sneaky tax rules for foreign trusts.
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It's never to early to catch a Buzz
May 19, 2010
Robert D. Flach rounds up recent tax blog fabulousity.
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Tax Nerd Radio
May 19, 2010
NPR will be airing a program on the history of taxes in America, from the first Tea Party to the current one. Joseph Thorndike has the details at Tax.com.
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It may be your money, but if you don't file your return, that can change
May 18, 2010
Tax refunds are like steaks in the freezer: they'll keep, but not forever. An Adel, Iowa couple recently learned this the hard way.
The couple had Iowa overpayments for 2000 and 2001. Unfortunately, they didn't get around to filing their tax returns until May 2008, well after Iowa's three-year refund claim window closed. In denying the claim, the Department of Revenue explained:
Because you did not file returns for those years until May 27, 2008, you did not make a claim with the Department within three years of the due date of the return or within one year after payment was made. The only payments you made in 2000 and 2001 were the withholding taxes you paid during those tax years, thus any claim for overpayment would need to have been filed with the department by April 30, 2004 for tax year 2000, and by April 30, 2005 for tax year 2001.Because of this statute of limitations, it is of no consequence that you indicated your desire to have the overpayment applied to future tax liability on line 71 of IA Form 1040.
The Moral? Losing a tax refund because you file late is even worse than a freezer-burned rib-eye.
Cite: Petro, Document 09201112, Docket No. 08-20-3-0183 8/18/2009.
Flickr image by VertualErn under Creative Commons license.
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Why your Iowa refund may be slow in coming
May 18, 2010
From gazetteonline.com:
Stuart Vos, the department’s revenue operations division administrator, said his agency is running behind in processing state refunds this year because state budget cuts wiped out the agency’s ability to hire temporary help to deal with the influx of returns during the last two weeks of April.A decade ago, the department would hire up to 100 temporary workers but in recent years that number shrunk to 50, he said. This year the number shrunk to zero and agency employees are being shuffled to help out with processing returns, he said.
It presents a dilemma for Iowa filers. If you e-file, your refund comes back sooner, but it's also appears more likely that Iowa will send you an incorrect notice asking for new taxes, or at least for an explanation of tax credits that they should already have from the e-filing. If the Department doesn't figure out how to properly get and interpret tax credit info from e-filings, preparers will revert to all paper returns to forestall these stupid notices.
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A center-left case against state corporate income taxes
May 18, 2010
From Tracy Gordon at the Tax Policy Blog: Take the State Corporate Income Tax… Please!
In 1983, Ronald Reagan proposed eliminating the federal corporate income tax. Last week, Michael Boskin took up the charge. I have another idea: Get rid of the state corporate income tax.State corporate income taxes are lineal descendants of the federal version and share many of its flaws. They doubly tax income at the firm and individual level, penalize businesses that organize as corporations, and reward debt versus equity finance. They also are very sensitive to the business cycle, and tend to plunge when the economy sags.
But wait… there’s more. Businesses often span many states. States differ in their rules for reporting and apportioning corporate income. Multi-state corporations hire vast armies of tax planners to exploit these differences.
Read the whole thing.
Related: The Tax Update's Quick and Dirty Iowa Tax Reform Plan
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I'm putting it on my credit card, so my expenses are down!
May 18, 2010
USA Today recently talked about how "low" our tax burden is. The Tax Policy Blog put this in perspective yesterday:
Tax Freedom Day® was April 9, 2010, but today -- May 17, 2010 -- represents the date on which Americans have worked enough to pay this year's tax obligations at the federal, state and local levels plus the federal budget deficit. Another way to put it: If tax collections matched spending, Tax Freedom Day would be today, an additional 38 days of work.Federal spending is at its highest since World War II. Using current deficit projections from the Congressional Budget Office, the average household's share of total spending is $31,737, and the average household's share of total taxes is $18,579, leaving a per-household deficit of $13,158.
Kay Bell has more.
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Estate tax: 35% rate, $5 million exemption?
May 18, 2010
Tax Analysts reports ($link) that the Senate Finance Committee may be nearing an estate tax agreement:
Kyl, the Senate minority whip and second-highest ranking Republican in the chamber, said he and Baucus have agreed on a 35 percent top rate and a $5 million exemption level indexed for inflation -- a proposal that "if at all possible," would be permanent, according to Kyl.
The story didn't say whether the repeal would be retroactive to January 1, 2010, when the estate tax went away. Other details, like gift tax levels and exemption and the ability to combine spousal exemptions, are also up in the air.
UPDATE, 5/19/2010: Estate tax deal? Not so fast
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Just because the IRS says it's so doesn't make it so.
May 17, 2010
Peter Pappas reports on sneaky IRS collection behavior.
Remember, IRS notices are often wrong. Even dedicated, well-meaning IRS agents (and that's most of them in my experience) can be wrong when trying to collect based on an erroneous notice. And like any organization staffed by humans, the IRS does have bad apples.
If the IRS wants money, don't just assume they are right. At the very least, check their numbers against yours. If you use a preparer, give them the notice and get the preparer in touch with the IRS. Above all, don't ignore the notice; once the IRS thinks you owe them money, you have to convince them otherwise, or the leviathan will slowly but surely keep after you until it gets paid.
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Ask not for whom the whistle blows
May 17, 2010
The IRS whistleblower program offers fabulous cash rewards, but tax criminal defense attorney Jack Townsend points out that it's a reward program, not an amnesty. He quotes from a Washington Post story:
The head of the IRS Whistleblower Office, Stephen A. Whitlock, declined to discuss the Birkenfeld matter, citing confidentiality law. Speaking generally, he said that the whistleblower program "is not an immunity program.""And if the person who is bringing us the information has some criminal exposure themselves," Whitlock said, "then they need to think about that."
So if you participate in an illegal tax deal and then try to blow the whistle, you might have to use your IRS award in the prison commissary for awhile.
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Today is Doomsday for non-filing tax-exempt organizations
May 17, 2010
Midnight tonight is the deadline for many charities to file 990-series returns or lose their tax-exempt status. As USA today puts it,
Hundreds of thousands of small non-profits, from Little League teams to community soup kitchens, could lose their tax-exempt status on Monday because of an IRS filing requirement.The 2006 Pension Protection Act included a provision requiring all non-profits to file an annual return with the IRS.
Previously, non-profits with annual revenue of less than $25,000 were excluded. Non-profits that fail to file a return for three consecutive years lose their tax-exempt status. On May 17, the three-year clock runs out for non-profits that haven't filed a return since 2007.
Fortunately, the required filing is a very simple on-line process if your organization normally takes in less than $25,000 per year -- you mostly just need to enter identifying information, with no financial detail. Bigger outfits will have to file a version of Form 990. If you need extra time, you can get a three-month extension by filing Form 8868 today. Some organizations, mostly governments and religious entities, are exempt from the filing and revocation rules.
If you are a treasurer or board member of a tax-exempt entity, you can go to this web site to see whether you might be losing your exemption.
The TaxProf has more.
Related: Is your organization about to lose its tax-exempt status?
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Iowa's corporate tax: deadly when it works
May 14, 2010
Iowa's corporation tax is a weird system of crushingly-high rates honeycombed with loopholes and giveaways that make it a joke. In a Des Moines Register op-ed this week, Peter Fisher says it's time to get rid of the loopholes and giveaways and just leave the crushing high rates:
The problem is not what corporations are paying. It's what they are not paying. When corporations don't pay their fair share of taxes that support their operations, other taxpayers must pick up the tab. That's already happening - disadvantaging small Iowa businesses and individual households. Our challenge is to restore corporate taxes to their rightful place in the mix of funding for public services.
Actually, the only reason that Iowa's highest-in-the-nation corporation tax rate hasn't destroyed the state's economy is that there are enough loopholes to make it a joke, except for the few corporations who by chance or by lack of good lobbyists actually stumble into the top rate.
While mistaken about the feasibility of an effective 12% Iowa corporation tax, Mr. Fisher makes a bigger error: he seems to think "corporations" pay taxes. In economic terms, corporations are just instruments of their owners for the conduct of business. Any tax on the business activity can only be borne by either owners, customers, or workers.
What if it's the owners? That means the tax is largely borne by 401(k) plans and IRAs -- by your retirement, in other words. Or it's borne by the mutual funds that you use to save for your future, or for college.
To the extent the tax falls on customers, it falls on Iowans. The Iowa corporation tax is determined based on sales within Iowa -- and on Iowa purchasers.
Much of the burden of the tax likely falls on corporation employees. As a 2009 report for the Federal Reserve Bank of Kansas City put it:
The incidence of a tax does not always fall on those responsible for remitting the tax. In the case of the state corporate income tax, labor bears a significant burden from the tax in the form of lower wages.
Peter Fisher has done good work pointing out the folly of Iowa's tax credit giveaway system. Sadly, he doesn't realize that Iowa's corporation tax is so severe that it would be intolerable if it wasn't so loophole-ridden. The answer is to combine Mr. Fisher's proposals to get rid of corporate welfare tax breaks with the elimination of the corporation income tax -- in other words, the Quick and Dirty Iowa Tax Reform.
Mr. Fisher also spreads a misconception about how the current system deals with large vs. small businesses:
What corporate tax opponents never tell you is that their position is decidedly anti-Main Street, and that Iowa's tax laws already favor large multi-state corporations.About 460,000 Iowa businesses file tax returns in a given year. Over 90 percent are farms, mom-and-pop stores and other proprietorships, partnerships and what are known as "S corporations." These overwhelmingly smaller, Iowa based businesses all pay income taxes under the individual income tax; only so-called "C corporations" pay corporate income tax.
Actually, Iowa's corporate tax system, which taxes corporations based solely on Iowa destination sales, is designed to screw out-of-state corporations in favor of Iowa-based businesses.
Here's how the Quick and Dirty Tax Reform brings parity to C and S corporations after repealing the Iowa corporation income tax:
I would allow S corporations to elect to be Iowa C corporations and make Iowans taxable on distributions from the corporation as if they were C corporations. Electing corporations would have to report distributions to Iowa shareholders to the state, and the shareholders would be taxed as if the distributions were taxable dividends; otherwise electing corporations would pay no tax on Iowa-source income. Iowans owning Non-electing S corporations would be taxed in Iowa on all their S corporation income.
So far nobody running for governor has been bold enough to propose this. It's a pity. The current system gives Iowa the fifth-worst business tax environment, and a terrible record for business development. A repeal of the corporation tax combined with a loophole purge would be a huge improvement.
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Targeted tax breaks, explained
May 14, 2010
It’s a great machine that politicians use to sell goodies to special interests. The special interest gets a tax break, the politician gets his take, and the rest of us get screwed.Tax expenditures don’t go through the normal appropriations process, and they almost never go away – like the bad brother-in-law who drinks all your beer. And perhaps because they've long been deemed sacred cows, the main stream media almost never writes about them.
Amen.
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Flying away from corporate welfare
May 14, 2010
Economic development bureaucrats say that bribing businesses to locate in your state is the only way to attract new businesses. Southwest Airlines don't need no stinkin' bribes:
Southwest Airlines will soon be flying through Charleston, South Carolina. That's good news for travelers looking for cheap airfare. Even better news: Southwest has declined the incentives that were being offered by the Charleston County Council. The business incentives would have been funded by a new 5% excise tax on car rentals.
The Tax Policy Blog gets the point:
This incident also serves to highlight the fact that often businesses make the decision to locate in an area, and only then do they start shopping around for incentives. Officials are usually all too eager to offer the unnecessary sweeteners that are obviously a waste of taxpayer dollars. In Charleston, the Council was ready to give away money that Southwest didn't even want.
But the local economic development hacks can't claim the credit for it, so as far as they and their political sponsors are concerned, it does no good.
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Famous in Pennsylvania
May 14, 2010
I rail against the creepy Pennsylvania tax amnesty ad in the Pittsburgh Post-Gazette. TaxGrrrl Kelly Philips Erb, who actually lives there, piles on.
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Will the cash ever come back to Peoria after it's seen the Caymans?
May 13, 2010
An Illinois doctor must have been very happy with his tax planning. After signing on with an outfit that set him up with a fancy trust arrangement, he made up to $1 million annually from 1996 through 2000 without paying any taxes (as described here). But like the guy falling off a tall building might say on his way down, "so far, so good."
Dr. David Kindred was a customer of the Aegis system, an offshore tax and trust scam that has sent its founders to prison, some for a very long time. It has also resulted in prison terms for some of its customers, which must result in awkward moments in the prison cafeteria.
When Aegis blew up, the Feds seized millions of dollars in "invested" funds, including accounts for Dr. Kindred. Today the Tax Court ruled that the doctor cannot apply the seized funds against his back taxes:
Moreover, there is no merit to petitioner’s claims for credit against his tax liabilities in this factual context. Even if petitioner’s pending motion in the District Court is granted and that court finds that petitioner’s funds were seized by the United States, petitioner would not be entitled to credit against his outstanding tax liabilities for 2001 and 2002 as of the date of the seizure. Criminal forfeiture serves a different purpose from satisfaction of income tax liabilities, and a taxpayer is not entitled to deduct the seized funds or to offset them against his tax liabilities.
The Tax Court today ruled that the doctor cannot credit the seized funds against around $2 million in taxes owed for 2001 and 2002. The case doesn't say how much money the doctor lost in the seizure, but it may be more than the $2 million. If he lost all of his offshore money and still has to pay the taxes on it, his tax planning turned out to be very expensive.
The Moral? When you send your funds offshore to hide them from the IRS, they might just hide from you, too.
Cite: Kindred, TC Memo 2010-107
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Chicken-flock shelter promoter lays an egg
May 13, 2010
Not all of us can be farmers.
That's one lesson we can learn from the fate of a Kansas City tax advisor. Alan Davison, who got his start at national accounting firms, was hit with a restrictive injunction against setting up tax shelters. The shelters had a lot of permutations, but the ones cited in the federal injunction order this week fell into three categories:
- Funnelling taxable income to tax-exempt entities through bogus "management fees";
- Making excessive or ineligible pension plan contributions, and
- Large cash-basis deductions using special tax provisions for farmers.
The first two categories are fairly common in the tax scheme world. They often involve offshore entities or ESOP-owned S corporation "management" companies, and they only "work" until the IRS spots them.
The third category is more interesting. Farmers can often take large deductions for items that would have to be capitalized in other industries. For example, an egg farmer can buy laying chickens and deduct them, where other taxpayers have to capitalize "productive" assets like machinery and depreciate them. Mr. Davison's shelters tried to make everybody a farmer. According to the court order, paperwork would purport to transfer flocks of chickens to taxpayers who weren't otherwise farmers, triggering big deductions. The judge decided that the deals were more like loans than chicken purchases, so they didn't work and were abusive. How abusive:?
"Davison deliberately advised his clients to break the law, and helped them go about doing so."
Harsh.
The tax law has a lot of ways to keep non-farmers from taking deductions meant for farmers only. The passive loss rules, properly applied, should normally have prevented the poultry-flock deductions. An obscure alternative minimum tax rule would also apply to disallow the losses for AMT. But the judge said that economic substance arguments kept the deductions from ever reaching even that far.
The Moral: Farmers are special, as far as the tax law is concerned. If you don't have dirty boots, don't claim the farm tax loot.
More at Going Concern.
Link: Department of Justice press release
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I'm skipping my credit card and mortgage payments this month, so my expenses are down!
May 12, 2010
A USA Today article is making a big splash: "Tax bills in 2009 at lowest level since 1950"
And it's all true, except for the taxes it doesn't count: corporate income taxes, payroll taxes, property taxes, and a bunch of others. It's also true to the extent that you can buy things and never pay for it: And here's how we're spending:
Source: usgovernmentspending.com. Click to enlarge chart
So if our governments are spending like crazy and taxes are unusually low, how's that going to work out?
More at:
Hat Tip: TaxProf
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Does your nonprofit turn become taxable on Monday?
May 12, 2010
Find out here. If you need to save your non-profit's tax-exempt status, go here to find out how to fix it.
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Good thing private collection agencies no longer menace taxpayer confidentiality
May 12, 2010
From the Taxprof:
TIGTA: IRS Releases Confidential Information to Callers Without Proper Authentication in 16% of Cases, Subjecting Taxpayers to Risk of Identity Theft
Peter Pappas has more.
Background: Treasury to shut down private collection
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Built-in gain hits six months after S election; the appraiser saves the day
May 11, 2010
It's common for corporations to get their assets appraised when they convert from C corporation status to S corporations because any "built-in gains" in the corporation when it switches will be taxed both to the corporation and its shareholders if recognized within 10 years of the switch.
It's not so common for a new S corporation to have a great big built-in gain triggered in its first S corporation year. That's what happened to Georgia's Ringgold Telephone Company when it became an S corporation. It's Subchapter S election took effect January 1, 2000. On July 11, it closed the sale of a partnership interest it had valued at $2.6 million Unfortunately for their tax planning, the sale price was over $5.2 million.
The IRS said that the $5,243,602 sale price was the best evidence of the value of the partnership interest when the S election took effect 6 months and 11 days earlier, so that was the value for computing the built in gain. The IRS assessed a $925,260 built-in gain tax and a $185,052 understatement penalty.
Naturally, the taxpayer didn't care for that answer and went to Tax Court. They got a new appraisal report by an outside appraiser ahead of the litigation. The new appraiser came up with a $2.98 million value as of January 1, 2000. The judge said that he had to take the sale price of the partnership interest into account, so he weighted the appraisers report at approximately 2/3, and the sale price at 1/3, coming up with a value of $3,727,142. He also ruled that the taxpayer acted reasonably in filing the return with the lower value, so no penalties were due.
The Moral? When you make an S corporation election, the money you spend on a good appraisal is money well-spent. Even if you are lucky enough to sell your assets for much more than you thought you could, a good appraisal can limit the amount of the gain subject to the corporation built-in gain tax while protecting you from valuation penalties. The burden of proof in built-in gain taxes is on the taxpayer; if you don't have a good appraisal, you are in for a tough battle.
Cite: Ringgold Telephone Co., T.C. Memo. 2010-103
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Michigan, Iowa go toe-to-toe in throwing away tax credit money
May 11, 2010
Michigan is all-in for the economic development tax credit game. The results could rival Iowa's film credit fiasco, reports theblogprof:
When an audit asked the question of what other shenanigans were happening with taxpayer money, they found plenty. From The Detroit News: Michigan audit: Some firms didn't comply with tax credit requirements. It's not until later in the article that you get the key nuggets of info:The auditor general's review of 15 out of 27 MEGA tax credits awarded during fiscal 2008-09 found that two-thirds of the companies didn't submit complete data needed so the Strategic Fund could validate the tax credits claimed. It also found a quarter of the nearly 4,800 employees counted toward the jobs totals companies were required to meet were potentially ineligible, resulting in companies getting tax credits they likely shouldn't have received.
No word on whether the Michigan credit scammers got Benzes or IPods out of the deal.
Related: Let them eat canapes
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I am Shulman, Creator of Professions
May 11, 2010
From Tax Notes ($link):
"We are about, essentially, to create a new profession out there," said Karen Hawkins, director of the IRS Office of Professional Responsibility (OPR), during an Administrative Practice section program discussion at the American Bar Association Section of Taxation meeting in Washington.
Because you don't have a profession until you find a way to use it create a new regulatory bureaucracy with dependent class of docile clients protected from low-price competition.
The IRS will soon embark on the first phase of a public education campaign regarding the return preparer registration requirements, Hawkins said. Eventually, the burden will be on taxpayers to make informed consumer decisions about the preparers they hire. It is possible that at some point taxpayers could become partly responsible for preparer mistakes if they fail to use registered preparers, she mused.
Interesting. Taxpayers are supposed to be responsible for their returns now. Will they get a "get out of penalties free" card when they go to H&R Block? Maybe that's somewhere in the preparer regulation rules the former H&R CEO wrote.
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FBAR baiting and switching
May 11, 2010
Is the IRS luring taxpayers to 'fess up foreign accounts with reduced penalties, only to slap them with the full 20% penalties using lame technical excuses? That's the disturbing pattern reported by international tax attorney Phil Hodgen:
We’ve heard that Revenue Agents are saying that the 5% penalty should be disallowed because there were deposits to the accounts during the time frame in question — and those deposits were the crediting of interest on inert accounts. They’ve also said that there were withdrawals which disqualified the accounts – where those withdrawals were normal bank fees.[Insert expletive here.]
I haven’t had that experience firsthand; these are reports from other lawyers I know who have cases like this.
He has an observation that the folks railing about "offshore tax cheats" should heed:
The IRS just doesn’t know what to do. It went out to catch tuna (the big bad tax evaders putting away millions of dollars at UBS) and killed a bunch of dolphins (the ordinary people living ordinary lives with trivial amounts of unreported income). Now it is finally dawning on them that they have a potential PR disaster on their hands. How to back down from publicly uttered threats without looking toothless and weak?
That's certainly been the kind of people I've seen take advantage of the amnesty. So far we haven't seen the IRS pull away the football; I hope it continues.
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Boy, you got to carry that weight
May 11, 2010
The Tax Policy Blog has posted two excellent maps on state tax burdens, including the map below on state tax burdens per capita:
Click to enlarge
For a really complex system with high rates, Iowa collects surprisingly little revenue.
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Taxes are hard: Iowa policy version
May 10, 2010
All three Republican candidates for governor have targeted the Iowa corporation income tax. Two candidates, Bob Vander Plaats and Rod Roberts, would eliminate it. Terry Branstad would cut the top rate in half. To its credit, the Des Moines Register tried to address the effects of the tax in a Sunday article. Unfortunately, the article how difficult it is to address a broken tax system.
Proponents of eliminating the corporate tax overstate their case with visions of an immediate stampede of new employers. Fixing the tax system would definitely be good for business and growth, but it takes time for the full effects to be felt.
Opponents of eliminating the futile Iowa corporation income tax tend to say that "essential" government services would take a hit. The article describes one think-tanker's views:
...ending corporate taxes would most likely prompt cash-strapped state government to increase fees in some areas or shift costs to local governments. County and city governments and schools in turn would most likely increase property taxes or fees to offset cuts to their budgets.
The candidates themselves deserve some blame for this because they tend to dance around where spending cuts will happen. They don't like to tell anybody on the corporate welfare dole that their gravy train will stop running. If you look at the math, though, you can find a way home.
- Iowa is likely to collect around $180 million in net corporation income taxes in the current fiscal year.
- Iowa is budgeting over $400 million in corporate welfare tax breaks this year, including the research credit, rehab credit and jobs credits.
- Iowa spends tens of millions more in green jobs pork and economic development pork through the Iowa Office of Energy Independence" and Vision Iowa.
Getting rid of the corporate pork would allow the elimination of the corporation income tax without biting into other parts of the budget. That's the approach of the Quick and Dirty Iowa Tax Reform. Too bad it's not also the approach of any of the candidates, yet.
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More service than the 'customers' wanted
May 10, 2010
Sometimes a tax preparer can go too far with client service. Filing returns for people who don't even know you to claim fraudulent refunds apparently crosses that line. A South Carolina preparer, Dorothy Anderson, has now been barred from the tax business, according to a Justice Department press release:
The court found that Anderson fraudulently prepared and filed tax returns using individuals' names and social security numbers without their knowledge or authorization. Anderson's preparation of false and fraudulent tax returns caused the United States to issue substantial tax refunds. The court found that Anderson deposited more than $290,000 in fraudulently obtained tax refunds into bank accounts she controlled, and then absconded with over $220,000 in fraudulently obtained refunds for her personal use.
Apparently the government didn't give her a break for providing "free" tax returns for those whose social security numbers she "borrowed."
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Will Congress change the rules for state tax systems?
May 10, 2010
Congress held hearings last week on how states apportion income for individual and corporation taxes, reports the Tax Policy Blog. 15 states now use "single-factor" apportionment, taxing income based on sales -- a policy pioneered in Iowa and designed to stick it to out-of-state businesses in favor of local ones.
As other states move towards single factor, Iowa loses its advantage and ends up with just a high tax rate. If Congress prohibits single-factor, Iowa's current tax system becomes disastrous. More reason to repeal Iowa's futile corporation income tax and adopt the Quick and Dirty Iowa Tax Reform.
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Been job hunting?
May 10, 2010
You might have some deductions for your job search, if you itemize and you are looking in the same field you had been working in. Kay Bell has the scoop.
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Pushing back at the IRS preparer regulation plan
May 07, 2010
Not everybody was on board with IRS Commissioner Shulman's preparer regulation power grab at hearings held yesterday on the proposed rules. The IRS wants to impose a broad new preparer testing and CPE regime on preparers.
The American Institute of Certified Accountants said regulation beyond assigning preparer ID numbers is not needed:
While the proposed PTIN regulations do not address education and testing requirements that are another part of the IRS's plan, Thompson said any new IRS examination process should be delayed. "The AICPA believes that successful implementation of the new PTIN registration process, coupled with making all preparers subject to penalties and Circular 230 ethics standards, should be sufficient to address problems with unethical and incompetent tax return preparers."
Another speaker, a Georgetown law student Chaim Gordon, challenges the IRS authority to even issue testing and competency regulations:
In its Notice of Proposed Rulemaking, the Service asserted that the proposed regulations were authorized under I.R.C. §§ 6109 and 7805.3 Earlier, in its Return Preparer Review, the Service asserted that “the preparation of a tax return for compensation is a form of representation before the agency” under 31 U.S.C. § 330.4 As my written comments demonstrate, none of these statutory provisions can provide the Service statutory authority to regulate who may prepare tax returns.
Whether or not the Commissioner's reach for power exceeds his grasp, the preparer rules are still a terrible idea. They're likely to drive seasonal preparers out of business in droves, leaving the field to the big boys like H&R Block, whose former CEO drafted the proposals. Prices for consumers will go up, driving consumers to underground preparers or do their own returns, which will hardly improve compliance. Far better to improve IRS data analysis capabilities to quickly identify patterns of non-compliance, like credit card companies monitor transactions for indicators of fraud. Better still to simplify our horrendous tax law so that fewer people need tax preparers in the first place. But that does nothing for H&R Block or the Commissioner's power base.
Related: Tax Preparers, Bootleggers and Baptists
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When you cheat on your taxes, make sure to get a note from your lawyer
May 07, 2010
Minnesota Bluesman Steve Renner, convicted of evading $1.1 million in taxes, got his money's worth for his legal fees. Where federal sentencing guidelines indicate a 41-51 month sentence for evading that much tax, the judge only gave him 18 months -- apparently based on advice from his lawyers. From StarTribune.com:
In explaining his rationale, U.S. District Judge Donovan Frank repeatedly mentioned a letter he had received from Renner's tax attorney, stating that he stood by his advice to Renner.Frank did not say he agreed with the attorney's advice. But he gave weight to the fact that Renner, an Internet entrepreneur and former local guitarist who never graduated from high school, followed it.
...
According to the indictment, Renner took money from his company, Cash Cards International, an Internet-based money transmission business, to pay for living expenses and coins, oil wells, art, stamps and vintage musical instruments. The money also went to promote his band, "Stevie Renner and the Renegades."
Renner's tax lawyer told him that he owed no taxes, saying much of the money he took was a loan and the items he bought were investments.
Just to be clear: the IRS and the courts long ago figured out that people can't just take "advances" from their corporations without paying taxes. Otherwise no business owner ever would pay taxes. If the attorney stands by that advice, think twice before you hire him for tax help, unless maybe your are going to cheat on your taxes anyway and want a shorter sentence.
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But failed public sector promises are just fine
May 07, 2010
Prof. Maule:
"The last thing Pennsylvania needs is another failed private sector promise."
When a private sector effort fails, the investors lose their money, the assets are liquidated by creditors and redeployed, and the failed effort ends. When a public sector effort fails, the politicians just feed the failure with your money.
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Take the bullet?
May 07, 2010
Is this the year to incur dividend tax on purpose? My new post at Going Concern.
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Automatic late filing relief for 5-year NOL Claims
May 06, 2010
An alert reader points out an item I'd missed in IRS Publication 536 (my emphasis):
An election to apply a 3, 4, or 5-year carryback period must be filed by the due date (including extensions) for filing your 2009 return. If you filed your return on time without making the election, you can still make the election on an amended return filed within 6 months of the due date of the return (excluding extensions) by attaching the election to the amended return, and writing “Filed pursuant to section 301.9100-2” on the election statement.
This means taxpayers who failed to either extend their returns or make the 5-year election on a timely return have another chance. Calendar-year C corporations can qualify for the Sec. 9100 relief on amended returns filed by September 15, and individuals have until October 15.
Remember, though: even though the usual carryback forms (1139 for corporations, 1045s for individuals) are due December 31 2010 for calendar-year 2009 taxpayers, the five-year carryback election is due sooner.
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Dim Sum Cavalcade
May 06, 2010
It's a browsing menu at the new Cavalcade of Risk!
You always want dessert at the internet's premier roundup of insuarance and ris-management posts. Don't miss Hank Stern's piece on travel insurance and the volcano.
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Because lies are built into the baseline
May 06, 2010
TaxVox: "Why We’re Going to Keep Patching the AMT—And Why It Will Cost So Much"
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Maybe you don't want to sell these in the neighborhood garage sale
May 06, 2010
Going Concern: "Looking for a Tax Break? Try Donating Your Erotic Artifacts to the Museum of Sex!"
But read the comment at the link before you get your hopes too high for grandpa's Playboy collection.
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Your call did not go through
May 05, 2010
Of all the stupid tax shelters ever marketed, the one promising disabled-access credits for investors in pay phones was definitely one of them. The investor would engage in a shaky lease with phone provider Alpha Telecom. Alpha made token investements to make the phones "ADA compliant" by giving the phones a longer cord and a volume control.
Flickr image courtesy joelogon under Creative Commons license.
The 8th Circuit Court of Appeals yesterday snuffed out the hopes for this deal for three Missouri investors. The Tax Court described the deal of one investor:
Petitioner received only bare legal title to the pay phones. He never had control over or possession of the pay phones, and all information regarding the pay phone locations came from Alpha Telcom.8 Alpha Telcom controlled the location of and entered into site agreements for the pay phones, collected monthly revenues, paid vendor commissions and fees, and repaired and maintained the pay phones. Alpha Telcom was entitled to 70 percent of the monthly adjusted gross revenues as long as they exceeded $58.34. The record does not show that petitioner paid any property taxes, insurance premiums, or license fees with respect to the pay phones.Petitioner also bore no risk of loss with respect to the pay phones. Alpha Telcom agreed to buy back the pay phones from petitioner for a fixed price stated in the pay phone purchase agreement. Alpha Telcom often paid petitioner a base amount of $58.34 per month regardless of pay phone profits.
The Moral: If your deal wouldn't convince a well-informed sixth-grader, it's not going to get past the courts either.
Cites:
Loveland, CA-8 NO. 09-2404
Doherty, CA-8, No. 09-2407
Snyeder, CA-8, NO. 09-2911
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This tax stuff ain't easy
May 05, 2010
TaxGrrrl defends the little guy who gets crosswise with the tax system:
So, just for the basics, a small business can expect to pay up to – and in some cases more than – forty-three tax returns. In one year.Do you think it’s possible – just possible – that a small business owner might miss one or two? Or three or four?
Does that make him or her a scofflaw? I say no.
In all of the years that I’ve been practicing, the large majority of my clients who owe taxes do so not because of a contempt for the law – but rather out of either a misunderstanding about:
1, what was actually due; or
2, when returns were actually due since some returns are not due at “regular” times – like the City of Philadelphia’s insistence on a March 1 deadline for wage tax reconciliations, even for individuals.
Considering what a small business is up against, it's amazing compliance is as good as it is.
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Smoke 'em if you got 'em. It's for the children!
May 05, 2010
Remember how the humongous settlement with the tobacco companies was supposed to create an endowment to support health costs and anti-smoking education? Here's how that worked out:
The plan was to set the other quarter of the tobacco settlement aside and over time that money would grow in interest to $1 billion by 2030.That projection though, is never going to happen. CBS 2 looked at the books. In the 2002 budget, just as quickly as $55 million went into the endowment fun, $40 million was transferred out to pay for K-12 schools. It happened again in 2003
Again showing that if you get money to the politicians, they'll spend it just as fast as they see it; if they don't get more money, you'll die in a fiery car wreck.
And if you feel guilty about smoking, just remember that you're doing it for the kids.
Via The Beanwalker.
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A nation of Pavel Morozovs
May 05, 2010
TaxProf: He quotes from a Bloomberg report:
Americans seeking reward money are turning in neighbors, clients and employers they suspect of cheating on taxes to the IRS at a rate of nearly eight per day, the director of the agency’s whistleblower program said.Steve Whitlock, the director, told an audience of about 200 lawyers, investigators and government officials at a Miami Beach conference on offshore banking that his office receives 40 to 50 tips per month alleging tax liability in excess of $2 million. Americans submit another 200 per month alleging smaller violations, he said.
Whitlock said submissions have surged since the enactment in 2006 of a law that requires the IRS to pay awards of between 15% and 30% in cases where more than $2 million is collected. Prior to the law, both the decision on whether to make an award and the amount of payment were discretionary.
Crush the Kulaks and Wreckers of the Code for fun and profit! But remember, the life of the patriotic tax snitch isn't all cash and glory.
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If they know so much, why do they need an amnesty?
May 04, 2010
The theme of Pennsylvania's creepy and disturbing tax amnesty ad campaign is that they know who owes taxes, so you might as well pay up and avoid penalties under the amnesty.
If Pennsylvania really had Syndrome's technology to help it zero in on tax evaders and perhaps blow them off the face of the planet, why would they need an amnesty in the first place? You'd think they would just collect the tax or vaporize the deadbeats. It's largely a bluff. They want to scare people they might not catch into paying taxes now without penalty out of fear of being caught later. That doesn't mean you shouldn't take advantage of the amnesty if you owe Pennsylvania taxes, of course; just because they don't have your number now doesn't mean they won't later.
Long-term, the amnesty is unwise policy. As the Tax Policy Blog explains:
Frequent amnesties, however, undermine compliance with the law; why be an honest taxpayer when the penalties will get thrown out eventually? If tax law is so complicated we have to waive people out of it, maybe it should be fixed for good. (Pennsylvania's last amnesty was 1995-96. The state swears that people who participate in this amnesty will not be eligible to participate in future amnesties.) Further, evaders caught after the amnesty will be assessed an additional 5% non-participation penalty, whether or not they knew about it.
Iowa just had its second amnesty a few years ago. It won't be long before revenue-hungry legislators start to float the idea again.
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The Big House has many rooms.
May 04, 2010
Anthony Jinwright, the Bentley-borne pastor of Greater Salem City of God church, is likely to find himself living out the gospel of Matthew ("I was in prison, and ye came unto me."), whether he likes it or not. A federal jury yesterday convicted him on 13 charges.* His wife, Harriet was convicted on four charges.
Rev. Jinwright was accused of failing to report $1.8 million of taxable income, helping to support a lifestyle that included a Bentley, a Maybach 57, a BMW 530i and five Lexus vehicles.
Flickr Creative Commons photo by jorbasa
His defense attorney commits financial accounting blasphemy with this argument (via The Charlotte Observer):
"The kingdom of God is not run on generally accepted accounting principals," Hinson said during closing arguments. "Thank God. If it were, we'd all be in trouble."
Does that mean Heaven has already adopted IFRS?
Anthony Jinwright, who endured about 11 hours of cross-examination last week, testified during the trial that he didn’t understand he’d been underreporting income.He said he trusted his financial advisors to get his taxes done correctly, and promised to pay his fair share in the future. Earlier, under questioning from his own lawyer, Ed Hinson, he testified that he’d been so busy traveling across the state and nation preaching the Gospel that he’d neglected his personal finances and those of his church.
Prosecution witnesses testified that they had warned Rev. Jinwright to report the items as income, perhaps leading the jury to believe that his tax problems weren't entirely a result of excessive missionary zeal.
UPDATE AND CORRECTION: Assuming a top rate of 35%, evading taxes on $1.8 million in income means a "tax loss" of around $630,000. Federal sentencing guidelines for a tax loss of that size start at a 33-41 month sentence. I had earlier mistaken the $1.8 million income evaded for the tax loss. My apologies.
*Earlier version of this post had the wrong number of charges for which conviction was returned.
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The staff accountants are in witness protection
May 04, 2010
Going Concern reports:
"Former PwC Senior Manager Charged with Supporting Terrorism"
From what I remember of my long-ago time at good old PW, that was pretty much their job description.
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May Tax Carnival!
May 04, 2010
The new Carnival of Taxes is up at Kay Bell's place! Head on over and have some springtime fun at the blogosphere's premier roundup of tax-related posts.
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Creepers
May 03, 2010
In case you ever thought the government was on your side, this creepy Pennsylvania Dept. of Revenue ad should cure you.
In real life "Tom's" house, targeted for remote destruction by Big Revenue, probably actually belongs to Kelly, who will come home from the store one day to find all of her locks changed while "Tom" blissfully watches television at a similar address three towns over.
Hat Tip: TaxProf.
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Why politicians like corporate welfare tax credits
May 03, 2010
Iowa State University economist Peter Orazem:
"You can't hold a ribbon-cutting event at an across-the-board tax cut"
Let alone call a press conference.
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How much tax is enough tax?
May 03, 2010
Greece has spent itself into crisis. It has an enormously bloated public sector spends 50% of that country's GDP - 20% more than the tax system generates. So Greece's real problem is -- that it doesn't tax enough?
No matter how profligate government spending is, there are always people who say that the real problem is that the tax system doesn't feed the government money as fast as it can spend it. Professor Maule sees any spending cuts in the notoriously corrupt and bloated New Jersey budget as a recipe for highway mayhem and death. The charmingly-named "VAT Bastard" at Tax.com sees the Greek calamity as a failure to collect taxes with sufficient ruthlessness to enable Greeks to retire before 60 after collecting 14 months pay for 12 months work during their working lives.
These people would make great credit counselors. When some schmoe comes in maxed out on credit cards and the repo man on his tail, their advice wouldn't be to cut up the credit cards and spend less. The poor guy is just failing to properly collect his revenue. Perhaps he could steal some things from the neighbors, or rob more convenience stores. At least that's approximately the plan for Greece.
Related:
Dan Mitchell: Greece's Problem Is High Tax Rates, not Tax Evasion (Via the TaxProf)
Peter Pappas: If You Oppose Tax Increases You’re Stupid, Exploited or Dishonest
US Government spending as percent of GDP.
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The tax-exempt time bomb
May 03, 2010
My new post at Going Concern.
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- EconLog
- Freakonomics Blog
- Greg Mankiw's Blog
- Jr Deputy Accountant
- Marginal Revolution
- Megan McArdle
- Re: The Auditors
- The Knowledge Problem
Tax Nerds
- A Taxing Matter
- About.com
- Andrew Mitchel International tax link
- Bed Buffalos in Your Tax Code
- BenefitsBlog
- California Tax Attorney Blog
- Death and Taxes
- Don't Mess With Taxes
- Farm CPA Today
- Federal Tax Crimes
- Janet Novak
- Leverage/SALT
- Mauled Again
- Missouri Tax Guy
- Our Taxing Times
- Peter Reilly
- Phil Hodgen's Blog
- Smartmoney Tax Blog
- Stacie's More Tax Tips
- Start Making Sense
- Tax.com
- TaxProf Blog
- TaxVox
- Tax Girl
- Tax Guide for Investors
- Tax Guru
- Tax Lawyer's Blog
- Tax Policy Blog
- Taxable Talk
- Taxes in the Back
- Tennessee Tax Guy
- Tick Marks
- Wandering Tax Pro
Gigablogs
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