Tax Update Blog: August 2010 Archives
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20 more for Eddie
August 31, 2010
Wesley Snipes' tax guru's vacation from the tax advice business has been extended. From a Department of Justice press release (no free link yet available):
Four promoters of a Florida-based business that sold illegal tax defiance schemes, American Rights Litigators/Guiding Light of God Ministries (ARL), were sentenced today by U.S. District Judge Royce C. Lamberth, the Justice Department and Internal Revenue Service (IRS) announced today. All four defendants were convicted in May 2010 following a one-month jury trial.Eddie Ray Kahn, formerly of Sorrento, Fla., was sentenced to 20 years in prison for conspiracy to defraud the United States and to commit mail fraud and one count of mail fraud. Stephen C. Hunter, formerly of Candler, Fla., and Danny True, of Deltona, Fla., were sentenced to 10 years in prison for conspiracy to defraud the United States and three counts of mail fraud. Allan J. Tanguay, of Flagler Beach, Fla., was sentenced to 10 years in prison for conspiracy to defraud the United States and to commit mail fraud and one count of mail fraud.
Quatloos provides a wonderful description of Mr. Kahn:
Eddie Kahn of "American Rights Litigators” represents the Hee-Haw contingent of the tax protestor movement. “Without any doubt, the most stupid of all the ‘professional’ tax protesters. Mr. Kahn's ‘arguments’ are so utterly juvenile and worthless as to barely worth the space I am using to type this sentence."~ Taxes.comEddie caters to the dumbest of the dumb, and his theories for not paying taxes are thus the dumbest of the dumb.
I think that's unfair to Hee Haw and the Immortal Roy Clark, who was much better at his craft than Mr. Kahn was at tax advising. Mr. Snipes choice of tax advisors says something about his business judgment.
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Deducting your Discover Card credits
August 31, 2010
The TaxProf reports:
In Priv. Ltr. Rul. 2010-027-015 (Apr. 5, 2010), the IRS ruled that (1) cash rewards on credit card purchases do not constitute income under § 61 to the card holder, and (2) cash rewards paid out to charity at the direction of the holder constitute a charitable contribution on the date the amount is received by the charity.
It's always good to get a deduction on non-taxable income, and it makes donations using such cards tax-efficient. But be careful:
The IRS also ruled that the written acknowledgment provided to credit card holders did not satisfy the recordkeeping requirement of § 170(f)(17) because it did not include the date the credit card company remitted the contribution amount to the charity.
Without such acknowledgement, you can't deduct contributions over $250. Presumably the credit card companies are fixing that as a result of this ruling.
Now if I can just find a way to deduct my half-filled punch cards from defunct coffee shops.
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Beam him up!
August 31, 2010
Former Congressman and convicted tax evader James Trafficant has secured an independent spot on the ballot for his old seat, reports Russ Fox. He can form a special caucus for the tax-compliance-impaired with Charlie Rangel if he wins.
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Flach and preparer regulation
August 31, 2010
Robert D. Flach is unconvinced by my arguments against increased preparer regulation. I think the argument boils down to whether the benefits of regulation are worth the costs. He thinks so. I think that's as much a victory of hope over experience as a fourth marriage.
Robert does make some interesting observations worth addressing when I have more time later. Meanwhile, he makes as good an argument for the bad case for preparer regulation as you're likely to find.
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Relax! Iowa is funding Hollywood again.
August 30, 2010
Iowa faces a $1 billion budget gap. Teachers and state employees have been laid off, salaries have been cut, courthouse hours are trimmed back and cases are delayed. But at least Hollywood is cashing in:
Two films, Sam Steele & the Junior Detective Agency and Ash, have received tax credits through the Iowa Film, Television, and Video Promotion Program. These are the first two films that have successfully been awarded credits from the Iowa Department of Economic Development utilizing the fully revised process of issuing tax credits."We are very pleased to be able to assist these companies with their Iowa projects," said Bret Mills, IDED director. "IDED, the Department of Revenue, Auditor of State's Office and the Office of the Attorney General, have designed and implemented a comprehensive process to ensure all parties involved have a clear understanding of the program and also that a full audit of the project is completed prior to the issuance of the tax credits."
The film program collapsed in scandal last fall, and the film office director and two filmmakers face criminal charges. Iowa is on the hook for $200 million for credits already committed -- about $66 per Iowan. Sure, it's tough for the 5,000 teachers that the $200 million could pay, but as a local opinion leader opines:
But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.
And maybe if you're close enough, they'll throw you a dime!
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So you go to the doctor because your head aches. The doctor tells you you have a headache.
August 30, 2010
The "Volker Panel" has issued it's report on tax reform options. After reading this from TaxVox, I'm having no difficulty containing my enthusiasm:
While there is almost nothing in this paper that has not been hashed over by prior studies, including the Bush commission, the PERAB report does a nice job describing what is wrong with the current tax code. And it includes some valuable hints, at least, about possible future policy choices. But, in the end, it does little to advance a debate the nation desperately needs to have.
Of course, it's not as though the problems with our horrendous and baroque tax code have been a national secret up until now. It doesn't hurt to count its non-blessings, but it doesn't move the ball much. But that may not matter, if the real purposes of the panel was to distract some inconvenient economists.
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Convictions of two KPMG defendants affirmed
August 30, 2010
A federal appeals court upheld convictions of two of the defendants convicted in the KPMG tax shelter trial after charges against most of the defendants were thrown out. Jack Townsend, a defense attorney in criminal tax cases, thinks the circuit court shouldn't have been so glib.
More from the TaxProf.
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There be trolls
August 30, 2010
The Tax Update is obviously a big fan of blogging, but dangers lurk everywhere -- dangers like copyright trolls. Megan Erickson's inaugural post at IowaBiz.com will help you stay out of troll country.
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Why I think the Tax Court judge got the passive loss 750-hour test wrong
August 28, 2010
Last week I questioned whether a Tax Court judge was correct when he commented that absent an election to combine rental real estate activities under Sec. 469(c)(7), each real estate activity has to meet the "750 hour test" to make a taxpayer a "real estate professional." This often would make a taxpayer's status as passive or non-passive hinge on a procedural foot-fault -- the filing of the Sec. 469(c)(7) election.
If a taxpayer becomes such a "qualified taxpayer," then rental real-estate losses can be non-passive, and therefore deductible even absent offsetting "passive" income.
An alert reader poses this question to me:
Re the 750 hour test, Reg.§ 1.469-9(e)(1) appears to support the judge's conclusion.Excerpt from reg:
"... Each interest in rental real estate of a qualifying taxpayer will be treated as a separate rental real estate activity, unless the taxpayer makes an election under paragraph (g) of this section to treat all interests in rental real estate as a single rental real estate activity. Each separate rental real estate activity, or the single combined rental real estate activity if the taxpayer makes an election under paragraph (g), will be an activity of the taxpayer for all purposes of section 469 ..."Your thoughts?
Well, they're long -- Jim Maule long -- so if you are interested in this sort of thing, read on.
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BDO Partner convicted of helping client deduct phony costs
August 27, 2010
From a Department of Justice Press Release:
WASHINGTON – A jury in U.S. District Court in Newark, N.J., has returned a guilty verdict against Stephen A. Favato, a resident of Point Pleasant Beach, N.J., and a partner in BDO Seidman LLP’s Woodbridge, N.J., office, the Justice Department and the Internal Revenue Service (IRS) announced today. The jury found Favato guilty of one count of corruptly endeavoring to obstruct and impede the Internal Revenue laws and one count of aiding and assisting in the preparation and filing of a false tax return
Some details:
The evidence presented at the trial showed that Favato advised Funsch to significantly reduce the salary payments that Funsch was receiving from his corporation and to instead have this compensation paid to Funsch’s limited liability company, Great Escape Yachts LLC, in the form of purported lease payments for Funsch’s yacht. However, his corporation had not leased the yacht. This course of action recommended by Favato enabled Funsch to fraudulently deduct his personal yacht expenses as business expenses. In addition, the evidence presented showed that Favato advised Funsch on how to falsely increase his expenses in order to fraudulently eliminate a portion of the gain on three properties that Funsch sold in 2002 and 2004. Finally, the evidence showed that Favato advised Funsch to report inflated charitable contributions on Funsch’s 2003 tax return.
The release doesn't say what happened to Mr. Funsch, but I wouldn't be surprised if it depended on how well he, er, cooperated at Mr. Favato's trial. That's the thing about helping clients cheat on taxes: when the Feds start pressing, the cheating clients sure won't be looking out for the cheating tax pro.
Prior coverage: BDO partner accused of assisting client tax evasion
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Do you want fries with that tax policy?
August 26, 2010
When you pick up your tax policy proposals at the drive-up window, you should make sure they're not half-baked before you drive away. O. Kay Henderson sets the stage:
An independent candidate for governor is proposing a tax break for Iowa workers who are paid by the hour. Jonathan Narcisse says the state should only collect income taxes on 40-hours of work per week, an idea inspired by a recent stop he made at Hardee’s.“It was about 3:22 a.m. and the young lady who waited on me had to be at her second job at 8 a.m.,” Narcisse says. “Why are we requiring her to pay taxes after 40 hours when she could use that money more than the Google millionaires in Council Bluffs or the Bill Gates’ Microsoft?” Microsoft recently announced it was building a processing center in West Des Moines.
This is a great example of tax policy by emotion. While the girl at Hardees maybe is having a tough time of it, she's financially in the same place as somebody who gets the same net salary for working a 40-hour week. And a state worker or union worker who gets time and a half for overtime, maybe double or triple-time for weekend or holiday work, could be a lot better off than a junior accountant or small shopkeeper who puts in a ton of overtime without getting any extra pay.
The proposal is also an administrative nightmare. To be enforceable, Iowa would have to have employers track and separately report hourly compensation on each W-2 -- a requirement that no other state has, and that would jack up costs for the businesses that write the paychecks -- and not enough of them in the current economy. Absent such a requirement, the break would be an invitation to massive cheating.
Fortunately, Mr. Narcisse is only slightly more likely to be governor than I am. Unfortunately, many people who do get elected to tax policymaking positions show no better judgement. The results include the special pension and Social Security breaks for old folks on Iowa 1040s (so Iowa needs to attract more old folks? At the expense of the not-so-old, and not so wealthy?). Another is the special Iowa credit for textbooks -- it may feel good, but it accomplishes nothing and is pretty much unenforceable.
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Wesley: it could have been worse
August 26, 2010
Wesley Snipes is still fighting his 3-year prison sentence for taking the foolish tax advice of Eddie Kahn.
While Mr. Snipes is understandably unexcited about going to Club Fed, it could have been much worse. A Florida dentist yesterday received a 42-month sentence for tax violations connected to Mr. Kahn. So maybe 36 months isn't so bad.
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All in all, I'd rather not be in Philadelphia
August 26, 2010
So you live in Philadelphia and you set up a blog. Since it's so easy, you signed up to carry Google Ads or something on your blog, and you get massive checks of $3.21 or so annually from them. Now the city has sent you a bill for a "business license fee" for $300.
The blog world has been all over this, but I've been waiting for TaxGrrrl, the definitive Philly tax blogger, to chime in, and now she has. An excerpt:
The license only applies to folks who are making money (even if it’s a little bit of money). It does not apply to folks who aren’t running a business or trying to make money. That means that bloggers who maintain a blog for the sake of sharing information but aren’t getting paid (or running ads, etc.) are off the hook.So, no vast conspiracy. No targeting bloggers. And no plan to try and silence free speech. No one was sitting around the Revenue Department searching online for Philadelphia bloggers. The City was acting on information that it got from the feds, something it does all of the time. It’s part of the normal information sharing that goes on (oh yeah, and states share information as between each other and the feds, too). A key difference this time was the scale of the notices and the speed at which information – even bad information – travels these days.
Of course, the City’s official position on all of this is that they’re merely trying to collect from taxpayers – each of whom should pay their fair share. That last bit is, I think, what’s really getting people going: What’s fair?
This $300 fee shouldn't exist to begin with. A city struggling to keep people working and businesses growing doesn't help itself with this sort of thing. And nothing forces the city to go after bloggers with a dozen readers and $1 in Google Ads revenue. It's as if they set up red-light cameras at every four-way stop in the city and started ticketing every car that failed to fully stop -- technically they have the legal right to do so, but what they are costing themselves with bad press and citizen annoyance has to outweigh any revenue benefits.
Other coverage:
TaxProf
Kay Bell
Instapundit
Tax Policy Blog
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Tax Lady: California lawsuit 'election year politics'
August 26, 2010
Roni Deutch, who has been sued by California Attorney General and aspiring governor Jerry Brown for allegedly swindling clients seeking settlements of their tax liabilities, has responded to the accusations in her Tax Lady Blog:
I believe the California Attorney General’s civil complaint against my law firm and me to simply be election year politics. My law firm has been representing taxpayers before the IRS for almost 20 years. We have saved thousands of people tens of millions of dollars. And I have fully cooperated with the California Attorney General’s Office over the past few months. As a result, I am very disappointed in their decision to file a complaint, but I look forward to a full and fair airing of this matter in a court of law where my law firm and I will aggressively and vigorously defend the claims against us, and I am absolutely confident we will prevail.
Prior coverage here.
Additional blog coverage:
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Feel like an egg?
August 25, 2010
The current salmonella outbreak brings calls for "more regulation." When big toy companies imported tainted toys, the result was more regulation. Reason.com notes that attorney-blogger Walter Olson finds similarities in the two situations -- the regulations make life hard on the little guy:
"Big Toy," notes Olson, was able to handle the regs easily and is doing fine (even though they were responsible for the imports that raised concern). Small boutique vendors were and are screwed.
Substitute "H&R Block" for "Big Toy" and you can envision the trajectory of the new IRS tax preparer regulation regime.
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Tax Tip: don't pay your income taxes with a pretend bond
August 25, 2010
When tax time came around, a Utah couple took an unusual route to tax payment. Rather than, say, mail a check, they sent the IRS "Private Discharging and Indemnity Bond No. RA819570054US-HDG" in the amount of $5 million, with the following instructions:
Upon receipt of this instrument, Payee shall charge account * * * via Pass-Through Account H DOUGLAS GOFF * * * for the purpose of terminating any past, present, or future liabilities express or implied attached or attributed to Account No. * * * and/or Lisa Stephens Goff * * *
Unfortunately for the Goffs, the IRS prefers their payments in more conventional form, like checks drafted on real bank accounts, or cash. The Tax Court sides with the IRS on this one:
Simply put, neither the note nor anything in connection with the note constitutes payment of petitioner's liabilities. The United States Code provides that "coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues." 31 U.S.C. sec. 5103 (2006). Section 6311 addresses alternative methods of payment and authorizes the Secretary to receive for taxes any commercially acceptable means that he deems appropriate as prescribed by regulations. Sec. 6311(a), (d). No regulation issued by the Secretary allows private bonds or notes such as the note to be considered payment by commercially acceptable means.
Bottom line: the couple has to come up with the taxes in a more conventional way, along with civil penalties for filing frivolous returns and a $15,000 penalty for pursuing a frivolous appeal. It seems like an expensive way to make a foredoomed and absurd tax return position.
Cite: Goff, 135 T.C. No. 11
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Burn, baby, Burn
August 25, 2010
Former and maybe future Iowa Governor Terry Branstad calls one aspect of his proposal for the Department of Economic Development "IGNITE." I was hoping for something like this:
But it's not.
Departments of Economic Development are normally fixers in the business of steering taxpayer money to favored businesses with connections and skilled wire-pullers. They have about as much to do with growing state economies as the Iowa Energy has to do with power generation.
You grow an economy with low and simple taxes and gentle, unintrusive state regulation. You allow your entrepreneurs to spend their time running their business, rather than filling out forms or lobbying for tax credits.
Philadelphia shows how not to do it.
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AICPA unhappy with expanding IRS regulatory bureaucracy
August 25, 2010
It sounds like the AICPA wants to be just a little pregnant.
The American Institute of Certified Public Accountants has objected to parts of the current round of IRS proposals, reports The Tax Advisor:
The AICPA’s comments focus on (1) the extension of the PTIN requirement to nonsigning employees of CPA firms; (2) the appropriate title for persons receiving a PTIN; (3) the IRS’s imposition of “reasonable user fees”; (4) foreign preparers; and (5) the comment period deadline.
But the AICPA is OK with other aspects of the IRS Commissioner Shulman's power grab:
The AICPA believes the issuance of one unique identifying number to each tax return preparer, coupled with making all preparers subject to the professional ethics standards of Circular 230 and the Code’s civil preparer penalty regime, will prove to be an effective method for addressing [IRS] concerns about taxpayers receiving competent and ethical service from qualified tax professionals.
It's sort of like letting cockroaches into your house. Once they're in, good luck trying to keep them in one room.
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How I think about the low-income housing tax credit
August 25, 2010
Pretty much every policy undertaken in the name of "affordable housing" does little or nothing to help the intended beneficiaries. Instead, these policies have major adverse unintended consequences and persist because of the large rents they give to industry participants. If there were any justice in the world, anyone who came to this sort of conference and uttered the words "affordable housing" would have their clothing instantly disappear and be replaced by a huge sandwich-board sign that says, "I shamelessly exploit sympathy directed toward poor people for my own profit and self-aggrandizement."
Unlike Arnold Kling, though, I'd prefer that the clothes stayed on.
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Iowa Capital Gain Deduction: an illustration
August 24, 2010
The Iowa Department of Revenue has posted a policy letter that nicely illustrates how Iowa's "ten and ten" exclusion for capital gains works on the sale of a business.
Iowa's capital gain exclusion applies on the sale of certain business property when a ten-year holding period and ten-year material participation requirement are met. The "material participation" rules are the same as the federal "passive loss" material participation rules, but with a special rule for "retired" farmers.
Flickr image courtesy cwwycoff1 under Creative Commons license
There are two separate exclusions:
- Capital gain on the sale of real estate used in the business qualifies for the exclusion if it has been held ten years, and if the taxpayer has materially participated in the business ten years, regardless of whether any other business assets are sold.
- All long-term capital gains incurred at the personal level on a sale of "substantially all of the assets" of a business meeting the ten-and-ten requirements qualify for the exclusion -- even for individual asset that themselves have been held for less than ten years.
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'Tax Lady' accused of unladylike behavior
August 24, 2010
California's Aspiring Governor Attorney General Jerry Brown has sued Attorney Roni Deutch, who blogs as the "Tax Lady," for "swindling" taxpayers who hire her to get taxes forgiven. From the AG's press release:
"Tax Lady Roni Deutch is engaged in a heartless scheme that swindled people with tax problems," Brown said. "She promises to significantly reduce their IRS tax debts, but instead preys on their vulnerability, taking large up-front payments but providing little or no help in lowering their tax bills."Deutch manufactures credibility by boasting that her tax resolution law firm, which has annual revenues of at least $25 million, is the largest of its kind in the nation. She spends $3 million a year on advertising, much of it on late-night cable TV, and frequently offers tax advice on NBC's Today Show, CNN, and CNBC.
Desperate debtors turn to Deutch based on her misleading ads that feature fictional testimonials claiming she secured large reductions in the featured clients' federal tax debts.
Her blog has no mention of the suit yet.
TaxGrrrl ("no relation") notes that Ms. Deutch paid $300,000 to New York to settle similar claims. The California lawsuit seeks $34 million.
While I have no insight on whether there is anything to the lawsuit, taxpayers shouldn't assume that TV "tax settlement" outfits really can perform the magic they claim. The limited work I've seen from TV tax settlement outfits was very unimpressive -- though I've never seen any work from the Deutch firm. The IRS usually will forgive debts only if you are really a "turnip" with no ability to ever pay the debt off. If you are that upside-down, though, you probably need more than just tax relief; you likely should be working with bankruptcy counsel.
The TaxProf has more.
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Wesley waits
August 24, 2010
Actor Wesley Snipes has received a delay for his 3-year sentence on federal tax charges. Variety reports that Mr. Snipes received an emergency stay of his sentence while pending motions on the case are heard. He had been scheduled to report to prison September 2.
Mr. Snipes apparently hasn't given up his fight to stay out of jail. He has filed a motion for a new trial based on a criminal complaint against a witness in his case and "an e-mail purporting that some jurors had thought he was guilty at the outset of the trial and had not thought he would go to prison." Of course, Mr. Snipes got in trial in the first place by believing implausible things, so he shouldn't get his hopes up.
Links:
Order staying surrender
Motion to stay
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Job hunting?
August 24, 2010
The Missouri TaxGuy has has a summary of potential deductions for job search costs.
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Don't think of the 401(k) as a tax-advantaged piggy bank
August 23, 2010
Megan McArdle speaks good sense:
In general, the point at which you're kiting debt--using home equity or the 401(k) to pay off credit cards or bad car loans--is the point at which you are in serious financial trouble. While transforming the debt to lower-interest rate forms can seem like salvation, it's not the answer. For one thing, the lower interest rates come with greater risk--of losing the house or your retirement savings, rather than your credit rating. For another, it won't work unless you get serious about controlling your money. I've watched colleagues do it (not at the Atlantic), and invariably after they refinanced the house, the credit card debt started to creep up again.
She adds that these sort of deals often use bankruptcy-exempt assets to pay down debts that bankruptcy can wipe out. Even from the viewpoint of a willful deadbeat, it may be best to leave the 401(k) alone until retirement.
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There's still time to claim a 5-year NOL carryback for 2009 or 2008
August 23, 2010
The IRS has issued a FAQ covering the temporary five-year net operating loss carryback rules that apply for 2008 and 2009 tax years. Here's an important bit:
Q8. When is the deadline for taking advantage of this NOL provision?A. You must make a WHBAA election by the due date (including extensions) for filing the tax return for your last taxable year beginning in 2009. This is true whether you make the election for losses incurred in 2008 or 2009.
If you file your 2009 tax return on time (by the due date without extensions) without making the election, you have an additional six months from the normal (unextended) due date of the 2009 tax return to make the election. See Treas. Reg. 301.9100-2 for the requirements for getting this six-month extension.
For example, an individual who files a calendar 2009 tax return by April 15, 2010, without making the election has until Oct. 15, 2010, to make the election for either 2008 or 2009 losses.
Calendar-year C corporations have until September 15 to make the election.
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They can't get the current rules right, so let's have them make more rules
August 23, 2010
Supporters of increased preparer regulation sometimes seem to envision an ideal system where wise, efficient and impartial IRS overseers will make sure only bad guys have any problems. Kip Dellinger, former chair of the AICPA Tax DIvision Practice Responsibilities Committee, tells how it works out in real life:
As a tax professional who defends other tax professionals and teaches professional standards, I have seen a fair amount of evidence across the country that IRS examiners are asserting preparer penalties in instances when the preparer isn't required to verify the specific items and appears to have properly counseled the taxpayer about the rules and recordkeeping requirements for claiming the items on the returns. Return preparer penalty assessments have also been proposed in situations when the client understated business income gross receipts for the information provided to the return preparer -- again, when it appears the return preparer had little reason to question or challenge the client's provision of gross receipts on a tax organizer information sheet.
The new regulations aren't just going to hit the other guy.
From Tax Analysts, via The TaxProf.
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He had it right the first time
August 23, 2010
It's refreshing to see a candidate say something sensible. Brad Zaun, seeking the 3rd District Congressional seat:
"But the fact of the matter is is your business — like every business out there — has to stand on its own two feet," Zaun said. "When government gets involved and tries to make a business successful, it never works out."
That's only controversial in the upside-down Land of Ethanol, where subsidies forever are as Iowan as farmer tans. Now Mr. Zaun has frantically backpedaled to the conventional corporate welfare-seeking stance on biofuels embraced by all Iowa congresscritters of both parties. Too bad. It would have been interesting to see somebody try honesty for a change.
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Preparer costs will increase some; taxpayer costs will increase more
August 21, 2010
Robert D Flach defends the IRS registration and examination process, and he poses the question:
I would like Joe, and others who feel the same way, to give me real specifics of how the new regulation regime will add substantial costs to a tax preparation practice.
I don't think I ever have said this will significantly increase preparer costs, though there will be an increase. Besides the $64.25, there will be time spent on dealing with the inevitable, and inevitably increasing, IRS paperwork. For those practitioners who get caught in the inevitable bureaucratic snafus when their registration or CPE records are lost in the system, there will be additional higher costs, but these will (one hopes) be limited to a relatively small subset of unlucky victims. For CPAs like me and attorneys who already meet CPE requirements, there will be time wasted on filing the same paperwork with a new agency, and, someday, on taking some pointless "competency" test. These will only increase with time, as regulatory agencies tend only to increase their own power and reach. But perhaps these don't rise to the level of "significant" costs to preparers.
More significant will be the costs borne by the taxpaying public. The additional costs and paperwork will lead many casual preparers to walk away from the business. This reduces the supply of preparers, while Congress does nothing but increase the demand. Reduced supply and increased demand means higher fees that will buy little increased quality. Quacks and charlatans will always find a way to stay in the system, and the "competency" testing will be perfunctory, or the system will fail entirely.
Rather than pay the increased costs, some taxpayers will stop getting help on their returns altogether and either self-prepare or drop out of the system. These dropouts certainly won't see improved service, though the regulators will never admit responsibility for that.
As Robert correctly notes, significantly better returns will only arrive when a better tax law does. The new regulations don't change that, so the preparer regime can't help much.
Yet once the regulatory system is in place, it will never be held to account. No matter how little evidence that the regulations are worth the cost, or how much evidence that they fail, the IRS will never admit failure, and the system will blunder on. Increased preparer regulation is a road that goes only one way. When preparer disasters happen under the regulated system -- and they will happen -- we will not be told that the money and effort spent on regulation was wasted, and that deregulation is in order. The prescribed answer to regulatory failure will always and only be more regulation.
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Roth & Company office closed August 20
August 20, 2010
Our offices are closed August 20, 2010 while we install a shiny new computer network. Univac willing, we will reopen at our normal time Monday, August 23.
Flickr image courtesy Bernt Rostad under Creative Commons license.
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It's not 'personal' goodwill if the corporation owns it.
August 20, 2010
Marc Ward asks a good question:
It is something to ponder during these dog days of August, why would a sole shareholder/dentist enter into an employment agreement containing a covenant not to compete with the PC? In essence, he agreed not to compete with himself.
The PC in question was a dental practice in Washington state. When he sold the practice, the shareholder reported the sale of $320,358 "personal goodwill" as his asset -- not the PC's -- and paid tax on it at personal long-term gain rates. The IRS disagreed:
As a result of an audit, the IRS recharacterized the sale of the goodwill as a corporate asset and treated the amount Howard received as a dividend. This resulted in a $60,129 tax deficiency plus $14,792 in interest.
As a result, the $320,000 was taxed twice -- on the corporate return at 35%, and again on the personal return.
Marc notes:
As the court points out, the case law makes it quite clear that an employee working for a corporation without a covenant not to compete owns the goodwill. See Martin Ice Cream v. Commissioner, 110 TC 189 (1998). But when an employee works for a corporation under an employment agreement with a covenant not to compete, it is the corporation and not the professional owns the goodwill generated by the professional.
The Moral? If you can't trust yourself not to compete with yourself, your partnership with yourself is doomed from the start.
Cite: Howard, USDC ED-Washington, No: CV-08-365-RMP
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Shulman power grab to be paid for by $64.25 charge per practitioner
August 20, 2010
The IRS yesterday issued proposed regulations to implement their new registration, testing and CPE requirements for practitioners. They also announced that all return preparers will have to pay a $64.25 "user fee" to pay the IRS for regulating them. $14.25 of that fee will go to private contractor Accenture -- once known as Andersen Consulting -- for their role in administering the new bureaucracy.
This program will increase the power of IRS, which is already well on the way to becoming a superagency with a portfolio in government activism from energy and industrial policy to health care. It will also increase the cost of getting a tax return prepared without a corresponding increase in the quality of the work.
The only way to really improve the quality of tax return preparation is to drastically simplify the byzantine tax law. That's not in the proposed regulations.
Russ Fox has more.
Correction: unintended error in headline had "Schuling" making the power grab. The Director of the Iowa Department of Revenue is blameless on this one. For the error, I'm not blameless. I plead temporary caffeine deficiency.
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When you shoot the jaywalkers, the jaywalkers might leave town
August 20, 2010
American citizens who fail to report foreign bank accounts under the "FBAR" program are subject to horrific penalties of up to half the balance of the accounts, per year. These penalties apply even for technical and unintentional violations. Phil Hodgen, a tax attorney specializing in international work, received an e-mail outlining the predictable, if unintended, consequences:
I am amazed however, at the number of normal Americans with normal jobs abroad who have never heard of the FBAR witch hunt and have no intention of participating. In addition, the fairly consistent message by Americans who have spent more than a few years abroad is that the benefits of holding the little blue book are hard to quantify and pale in comparison to the nightmare of compliance with the oppressive American tax regime. Over 12 days in [New Country], I heard the words “renouncing my citizenship” over 20 times.I am aghast that our government would continue to force intelligent Americans, who otherwise fully intend to move back to the US for their retirement – if not before – to this conclusion.
We'll see if the tax policymakers come to their senses before their next foot-fault crackdown. That's not the way to bet.
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Got UBIT? Why IRAs need to be careful where they invest
August 19, 2010
A reader writes :
Hello, I saw online that you answered tax questions. I would really appreciate it. I didn't find this answer really in the instructions. I am a preparer and this is my first UBIT return.I have a ROTH IRA that is self-directed. There is UBIT. Have an EIN number from IRS and extension is filed. The income is coming over on schedule K-1s from partnerships and LLCs. Questions are:
First K-1 has in box one and box 20V income of $1,400
Second K-1 has losses in box 1 and box 20V of $800. So a negative number.
Question number one: Does the negative, since if we add the two together, mean the return doesn't need to be filed because income is below $1,000?
Question number two: Since one k-1 goes over a thousand dollars is it a good idea to file it anyway?
(Note - numbers and wording changed slightly from original note.)
"UBIT" is the "unrelated business income tax," which is pretty much the corporation income tax applied to non-profits who have business income. The idea is to keep tax-exempt entities from competing unfairly with taxable businesses. Business income is pretty much anything other than contributions, interest, dividends, and capital gains. Rent income can be taxable to non-profits that have debt, including secured debt on rental property. If a tax-exempt organization -- including an individual retirement account or retirement plan -- gets a K-1 with business income from a partnership (LLC) or S corporation, it likely will have to file a Form 990-T and pay UBIT.
There are two $1,000 thresholds that confuse many taxpayers. There is a $1,000 "specific deduction" in computing UBIT (Sec. 512(b)(12)). This means an exempt organization will not have to pay UBIT unless its taxable income exceeds $1,000. Unfortunately, there is a second threshold, outlined in the Form 990-T instructions:
Who Must File
- Any domestic or foreign organization exempt under section 501(a) or section 529(a) must file Form 990-T if it has gross income from a regularly carried on unrelated trade or business, of $1,000 or more. See Regulations section 1.6012-2(e). Gross income is gross receipts minus the cost of goods sold.
That means an IRA that has taxable income from K-1s under $1,000 is likely to have gross income over $1,000; gross income is computed without deducting any general and administrative expenses.
While partnership K-1s are supposed to report unrelated business taxable income (1065 K-1 box 20, code V), they often fail to report gross income (it may show up on box 14, codes B and C, or box 16, codes B and C); sometimes they fail to make a UBIT computation. S corporation K-1s have no UBIT information, so taxpayers have to either assume all line 1 income is UBIT or get additional information from the corporation.
In the case of our questioner, it is probably smart to file the 990-T, because the IRA's share of partnership gross income is probably over $1,000. There will be no tax due, based on the numbers provided, but filing will avoid any failure-to-file penalties and get the statute of limitations running.
In general, it's best to avoid these issues for your IRA by not making investments that can generate UBIT. If you are going to generate a tax, do so on the personal return that you have to file anyway; don't generate a tax return for an IRA that would otherwise not have to file one.
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We eat space pork in Iowa
August 19, 2010
Florida Senator Ben Nelson is pushing corporate welfare tax breaks for space ventures in a naked grab for federal bucks for his constituents. TaxGrrrl reports:
Which states won’t benefit from the proposed tax credit? Well, Iowa, certainly. Nelson’s press secretary, Bryan Gulley, said about the state’s prospects, "You couldn’t do it in Iowa, or you couldn’t do it where there is no space industry and no high unemployment. Clearly, it’s intended to help communities where there already has been an established space industry, and communities where NASA already has a presence." So take that, Iowa.
Oh yeah? Iowa is the home of Rockwell Collins, the avionics giant that has had its share of the space budget. Let's dial the wayback machine to July 20, 1969:
When Mission Commander Neil Armstrong nudged the Apollo 11 Lunar Module safely down onto the magnificent desolation of the lunar surface at 3:17 p.m. CDT on July 20, 1969, Jim Westcot was at work as an Apollo program administrator at the Collins Radio Company, which is known today as Rockwell Collins.For the past four evenings, Westcot, his wife, Helen, and their three daughters had convened on the open deck of their Cedar Rapids, Iowa, home to scan the night sky. They kept vigil for the telltale white pinpoint of light of Apollo 11 as it slowly, steadily drew toward the moon.
Yes, much of the equipment for the moon landing was engineered in Iowa. So don't think you get all the space pork, Senator Nelson.
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It's OK to feed them to piranhas, they're rich.
August 19, 2010
Both Kay Bell and Howard Gleckman (TaxVox) have posts today about how much "the rich" will be hit by the expiration of the Bush-era tax cuts. The obsession of policymakers with "the rich" seems to say that there is such a thing as a free lunch, because you can always make somebody else with more money pay for it.
Life doesn't work that way. It's foolish to think you can create expensive entitlements for everybody that somebody else has to pay for. Eventually somebody else runs out of money.
Anybody who wants to increase taxes on "the wealthy" should first address these questions:
- What rate do you want to see the "rich" pay? If it's not the proposed 39.6% (or 43.4% under Obamacare), what is it?
- Is there some point where a taxpayer should have a right to keep his earnings, no matter how much?
- Does raising tax rates on "the rich" backfire at some rate? Is there a tax rate that damages the economy enough that the harm caused to the non-rich exceeds whatever benefits come from raising tax rates? What is that rate?
- Is there some point where you will say the government has enough money and power and shouldn't get bigger? What is that point?
Until people who want the Bush cuts to expire answer these questions, I assume that the proposed Obama rate increase is just a down payment on their next tax increase.
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IRS issues Applicable Federal Rates (AFR) for September 2010
August 18, 2010
The IRS has issued (Rev. Rul. 2010-20) the minimum required interest rates for loans made in September 2010:
-Short Term (demand loans and loans with terms of up to 3 years): 0.46%
-Mid-Term (loans from 3-9 years): 1.94%
-Long-Term (over 9 years): 3.66%
The Long-term tax-exempt rate for Section 382 ownership changes in September 2010 is 3.99%.
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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Murphy Farms hit with 40% penalty for tax shelter on their sale to Smithfield
August 18, 2010
When big hog farm operator Murphy Farms was acquired by even-bigger Smithfield Foods in 1999, the Murphy family faced a big capital gain tax. Like many taxpayers at the time, the family tried to avoid the tax through a generic tax shelter offered by one of the national accounting firms. They ended up using a "COBRA" transaction sold by Ernst & Young -- a version of the "Son-of-Boss" shelter. The Court of Federal Claims explains (footnotes omitted):
COBRA involved foreign currency options. The strategy called for at least two individuals to each simultaneously sell a short option and purchase a long option at a different strike price. The individuals then transfer the option contracts along with cash to a newly formed general partnership, receiving in return an interest in the partnership. So long as the options expired out of the money, the partnership recognizes a loss. The individuals then transfer the entire partnership interest to a newly formed S corporation, which causes the partnership to be terminated. The partnership liquidates and distributes its investments to the S corporation. The S corporation sells its assets to an unrelated third party, generating a loss for tax purposes.
Because there are offsetting long and short positions, the taxpayer is protected against a real economic loss. The IRS issued a notice attacking these basis-shifting tax shelters, and E&Y stopped marketing the shelters. The family chose to go ahead with the shelter anyway, and the accountants agreed to set it up after the Murphys singed an agreement to hold them harmless from any penalties. According to the court, E&Y earned $2.5 million for their efforts to shelter a $100 million gain.
Flickr image courtesy Laertes under Creative Commons license.
The IRS disallowed the Murphy losses, and, perhaps as a result of universal failure of taxpayers to prevail on these deals in court, the Murphy family conceded to the IRS adjustments. They weren't too crazy about the 40% gross valuation misstatement penalty. They appealed it to the Federal Claims Court, citing reliance on their internal tax guru and Ernst and Young.
Not surprisingly, the court didn't allow the family to rely on their in-house advisor for "independent" advice. As to Ernst and Young:
In the circumstances presented here, reliance on E&Y's advice was not reasonable. As the Federal Circuit stated in Stobie Creek: "Reliance is not reasonable, for example, if the adviser has an inherent conflict of interest about which the taxpayer knew or should have known." 608 F.3d at 1381. The Murphys could not reasonably have expected to receive independent advice from the same firm that was selling them COBRA. Because E&Y had a financial interest in having the Murphys participate in COBRA, the firm had an inherent conflict of interest in advising on the legitimacy of that transaction.That conflict of interest was exacerbated by the fee structure. The Murphys have conceded that from the beginning they understood that E&Y's fee would be a percentage of their desired tax loss.
Assuming the $100 million Murphy capital gain was taxed at 20%, the penalty is $8 million, on top of the $20 million in tax and the $2.5 million shelter fee.
The Moral? If you want to rely on ouside advice to avoid potential penalties, make sure the advisor isn't on your payroll and doesn't get paid based on the amount of your tax savings.
Cite: Murfam Farms LLC, Ct. Claims Nos. 06-245T, 06-246T, 06-247T
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IRS deadlines extended for some flood disaster areas
August 18, 2010
The IRS this week announced limited relief for taxpayers in counties affected by flooding on June 1. This relief does not cover the flooding in the last two weeks in Central Iowa; those counties may be covered in a a future relief declaration.
Yesterday's relief allows taxpayers in affected counties to file returns due from June 1 through August 2, 2010 as late as August 2 without penalty. Taxpayers with tax deposits due between June 1 and June 16 -- for example, payroll tax deposits -- are allowed to file as late as June 16, 2010 without penalty.
The counties covered:
Black Hawk, Cherokee, Clayton, Decatur, Delaware, Dubuque, Fayette, Franklin, Hamilton, Howard, Humboldt, Ida, Jackson, Jasper, Jones, Kossuth, Lee, Lucas, Lyon, Mahaska, Marion, O’Brien, Osceola, Polk, Ringgold, Sioux, Story, Taylor, Union, Warren, Webster and Wright.
Taxpayers in affected counties with deductible flood losses can claim them on amended 2009 returns or 2010 returns.
Cite: MIL-2010-15-IA, Aug. 16, 2010
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State Fair week Buzz
August 18, 2010
New Jersey tax preparer Robert Flach may be unable to take advantage of the wonders of this year's Iowa State Fair, but he can browse the virtual fair of the tax blog world. His new "Buzz" roundup of tax blog posts is up!
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What we can't kill through the courts, we'll kill administratively
August 18, 2010
The TaxProf reports: Justice O'Connor Blocks IRS Imposition of 'Business Death Penalty' on Tax Preparer
An Eleventh Circuit Appeals Court panel, in an opinion by retired Supreme Court Judge Sandra O'Connor, upheld a district court decision that applied limited sanctions on a tax practice, but refused an IRS request to shut it down.
While courts are showing reluctance to apply a "business death penalty" to errant preparers, the IRS is arrogating the ability to be prosecutor, judge and executioner with its new preparer regulations. Supporters of increased preparer regulation should consider whether they really want the IRS to be able to close them down without the opportunity to go to court to defend themselves. I don't have abundant faith that the IRS will go out of its way to respect preparer rights.
Peter Pappas has more.
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Busman's holiday
August 18, 2010
Farmer-CPA Paul Neiffer is using his vacation time to visit Midwest Farms. His Grand Tour takes him to Spencer, Iowa today. He says the beans look good in Nebraska.
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Tax Amnesty Roundup
August 18, 2010
Kay Bell: Tax amnesty begins in DC; Ongoing in FL, NV & NM; Coming soon in KS, IL & ME
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Why it's tough to have "non-passive" real estate activities
August 17, 2010
The passive loss rules enacted in 1986 aimed right at the real estate business. The rules, which disallow "passive" losses until they can be offset by "passive" income, generally treat rental real estate as "passive" no matter what.
There is a narrow exception for "materially-participating real estate professionals." These taxpayers can determine whether their real estate rental is "non-passive" based on the usual rules for passive losses, which depend on how much time you spend on the activity. For example, your "materially participate" in an activity if you spend 500 or more hours on the activity in a year, or if you spend more than 500 hours on multiple activities that you spend 100-500 hours on each.
But first you have to be a "materially-participating real estate professional." To qualify you have to meet two requirements under Sec. 469(c)(7):
- You have to work more than 750 hours in a "real property trade or business," and
- your real property trade or business hours have to exceed your working time in non-qualifying businesses.
A Tax Court decision issued yesterday illustrated how hard it can be to clear this hurdle. A woman who worked as an office manager for a real estate broker (she wasn't an owner) also owned and managed three rental properties with her husband. She claimed the rental property losses as non-passive.
The Tax Court pointed out an important limit on the real estate professional rule: it doesn't count service "as an employee." If you don't own at least five percent of the business that gets you to your 750 hours, those hours don't count. The court quoted IRS Publication 925:
Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest.
That meant the taxpayer, a Mrs. Bahas, had to meet the 750-hour test with just the rental properties. As the taxpayer stipulated that the time spent on the rental properties was less than 750 hours, she failed this test.
As an aside, the court made an assertion about the 750 test that strikes me as incorrect. The tax law allows qualifying real estate professionals to elect to "aggregate" their activities so they can combine their working hours for the material participation tests. The Court drew this conclusion:
Because petitioners did not elect to aggregate their real estate rental activities, pursuant to section 469(c)(7)(A) petitioners must treat each of these interests in the rental real estate as if it were a separate activity. See sec. 469(c)(7)(A)(ii). Thus, Mrs. Bahas is required to establish that she worked for more than 750 hours each year with respect to each of the three rental properties.
Sec. 469(c)(7)(B) has the 750-hour requirement:
(B) Taxpayers to whom paragraph applies. This paragraph shall apply to a taxpayer for a taxable year if—(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates
There is a circular logic here - you can't "materially participate" unless you have 750 hours, but those activities have to be ones in which you "materially participate" in the first place. It seems just as logical to apply the normal non-real estate"material participation" rules to see whether you "materially participate" in adding up your time under the 750-hour rule. Reg. Sec. 1.469-9(b)(5), the regulation that covers the real-estate professional rule, seems to apply this logic:
Material participation has the same meaning as under §1.469-5T
The 1.469-5T rules are the normal material participation rules, without regards to the special real estate rules. So in spite of the aside in this case, it appears to me that you should be able to pass the 750-hour test by combining two 500 hour activities, or, say, 4 300-hour "significant participation" activities. Of course, these would still have to exceed your other non-qualifying hours.
The Moral? You have to own a real estate activity to count the hours for the real-estate professional exception. If you want to meet the 750-hour/more-than-half-your-time participation requirements using your time managing multiple activities, you may want make the election to aggregate them; at least one Tax Court judge won't count your time otherwise.
Cite: Bahas, T.C. Summary Opinion 2010-115
Related: NON-PASSIVE RENTAL LOSSES: NO FUN WITH DICK AND JANE
Material Participation rules are oulined below.
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Can you deduct your cabin at the lake?
August 17, 2010
My new post at IowaBiz.com, the Des Moines Business Records' group blog for entrepreneurs.
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State Fair week Cavalcade!
August 17, 2010
The Iowa State Fair is rolling along. If you can't be there, fire up the front-end loader and head straight to the new Cavalcade of Risk at Insurance Writer.
Among the latest in the blog world on insurance and risk management is Hank Stern's take on the Ohio Obamacare high-risk pool, just getting under way:
"Healthy" Jane would pay an additional $456 per month for this (optional) coverage, and have to wait 9 months for it to become effective. Not so for "sick and pregnant" Jane, whose coverage could be in effect in as little as a fortnight. In fact, "pregnancy (current)" is one of the automatic qualifiers for coverage.
That's an interesting incentive structure.
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Another appeals court strikes down related party like-kind exchange
August 16, 2010
The IRS and the Tax Court have made it very dangerous for sellers to close a deferred like-kind exchange by having a qualified intermediary buy the replacement property from a related party. Last year an appeals court agreed with the IRS position for the first time when the Ninth Circuit upheld the Tax Court's Teruya Brothers decision.
Now another appeals court has upheld the Tax Court's disallowance Sec. 1031 benefits for acquiring replacement party from a related party. Here's the facts from our old post on the Tax Court decision:
Georgia real estate developer Charles Jones got an attractive offer for Wesleyan Station, a shopping center he owned through a corporation called Ocmulgee Fields, Inc. He wanted to limit his taxes, sensibly, so he had the sale arranged through a qualified intermediary to allow it to qualify as a Section 1031 Like-kind exchange. That gave him 45 days to find potential replacement properties and 180 days to close on one.With the deadline looming, Mr. Jones' efforts to find a replacement property weren't going well. To keep from being taxed on the gain on Wesleyan Station, he had the intermediary buy a replacement property from an LLC he owned with one of his sons.
The 11th Circuit Couut of Appeals ruled last week that the tax avoidance motives of the Ocmulgee Fields transaction disqualify it from Sec. 1031 benefits. Sec. 1031(f) applies a "tax avoidance" restriction to swaps that doesn't apply to exchanges between other parties, if the property acquired in an exchange is disposed of within two years. The courts read related party swaps run through an intermediary as an immediate disposition of acquired property (the property sold through the intermediary) by the related party.
Of course tax avoidance is the whole point of most Sec. 1031 exchanges. The way the courts are applying this test, it's hard to see how any related-party exchange run through an intermediary can succeed.
Cite: Ocmulgee Fields Inc, CA-11, No. 09-13395.
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Small = the ones we don't raise the taxes on
August 16, 2010
Fans of letting the Bush-era tax cuts expire for "the rich" love to say that only 2% percent of "small businesses" will be hit by the tax increase. When they do so, they define "small business" in such a broad way -- including every 1040 that has partnership or S corporation income, or schedule C income -- that it includes every partner in a partnership, every part-time moonlighter, and every Mary Kay rep.
Awkwardly for tax-increase proponents, the top rate will hit 43% of the taxable income of these "small businesses" -- in other words, a very big chunk of economic activity. Joseph Rosenberg addresses this dilemma at TaxVox (my emphasis):
What do we know about the types of businesses that are generating these large incomes? Unfortunately the answer is not as much as we would like. Individual returns provide very little information about the underlying businesses and the IRS does not release any firm-level data to the public. A 2008 JCT study (see Table 8a) reports that 61 percent of net income from partnerships and S corporations is earned by firms with gross receipts over $10 million and fully 43 percent by firms with gross receipts in excess of $50 million. Those data suggest that the majority of affected income may not come from what we generally think of as a small business, although we do not know whether large and small firms differ in how they distribute income among taxpayers in different income groups.
This implies that the way to deny that the tax increase on top incomes is also a significant increase in taxes on business operations is to say that it's fine, as long as the tax is paid by someone who we don't "generally think of as a small business." As long as you are so small as to not have much income -- as long as you are unsuccessful -- they'll refrain from taking more of your money.
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Sometimes taxes are the least of the problems
August 16, 2010
When North Korea collapses someday, it's going to be expensive. The best case scenario is something like the collapse of East Germany. The worst case would have North Korea collapsing in a spasm of war, with the destruction of Seoul and much of the South Korean economy. But even the best case could cost $1 trillion.
The differences between North and South Korea are almost unimaginable. The North Korean economy is about 3% of the size of the South Korean economy. North Korean adults have lived through state-induced mass starvation and have very little concept of how to function in a market economy. Reunification of a cowed and battered North Korean populace into a market economy would be like dropping a bunch of Iowans from 1860 into 2010 and expecting them to figure it out.
TaxGrrrl has more.
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Time to Say Hello
August 13, 2010
Looking for fun in Des Moines? Who isn't! So head on downtown tonight to the 4th Street Theatre next to Java Joe's, between Court and Walnut, for the CD Release party for Foxboro's debut release, "Time to Say Hello." They'll be there from 8:00 pm until 11:00, according to their Facebook page. This video of the band from two weeks ago gives you an idea of what you'll see:
Admission is free, but I'm hoping some portion of the CD proceeds will go to fund the bass player's education.
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The Iowa Tuition Credit: a strain on the Treasury?
August 13, 2010
Does Iowa's 65% private school tuition organization tax credit drain the state's coffers to no good effect? That's the question raised in a long-form article by The Iowa Center for Public Affairs Journalism, an outfit that's news to me.
They point out how the credit, which rewards contributions to organizations that subsidize tuition to private schools in Iowa, can make such contributions nearly cost-free to donors:
One donor, who gave $175,000 to scholarship funds, received a credit of $113,750 from the state and was eligible for a $61,250 federal tax reduction, amounting to virtually no out of pocket costs.
The article says the program is touted as reducing government costs by reducing public school enrollment, and that the evidence is scanty that it has done so. The article also says:
-Almost all of the tuition grants benefit religious schools, putting Iowa civil libertarians on the lookout for a church-state suit against the state.
Well, yes, the secular humanists haven't gotten the Christopher Hitchens Happy Day School off the ground yet.
-The state does not have information to determine whether the tax credits are merely benefiting parents with children already in private schools;-The law does not require the state collect sufficient data to allow it to ensure only eligible students – those from low and middle-income families – receive scholarships.
Certainly true. Like all tax credit programs, the legislators are a lot more eager to run spending through your tax return than to monitor the spending.
Tuition organization credits are really a backdoor way to try to provide competition to the public school monopoly. A voucher program would be much more transparent, and would probably make it easier for the poor to escape failed schools, all without mucking up the tax law, but the opposition is fierce. The same people who fight imaginary private monopolies are dead set against breaking the state education cartel.
Related: Year-end planning and the Iowa School Tuition Organization Credit
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Make mine a double, the rich guy is buying
August 13, 2010
The Tax Policy Center has a bunch of new tables on how the expiration of the Bush-era tax cuts will affect different levels. It's useful information, but the obsession with how taxes affect "the rich" is unhealthy. Listening to some politicians, it would be fine to burn taxpayers at the stake and sell their wives and children into slavery as long as it only affected the top 2% of the income distribution.
It would be clarifying if advocates of sticking it to the rich would discuss:
- Is there any limit to the amount of personal earnings that the government has a right to claim?
- Is there ever a point that taxing the "rich" hurts everyone because it damages the overall economy? What is that point?
- Is there some limit to ability of the government to solve the problems of the less well-off by taking money from the "rich"? Can you ever tell if that work is done?
- Are there any failed government programs?
Even though I suspect the answers would always be "no," it would be clarifying.
Related: Peter Pappas, Because that’s Where the Money Is
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Maybe I'm only a half-accountant?
August 13, 2010
There's a 10-question quiz up, "10 Ways to Know You Were Born to Be an Accountant" (Hat tip - TaxProf). If you take the test and find you, too, are an easily-bored misanthrope, don't lose heart. I passed the CPA exam (the hard one, back when it was on paper, you punk kids) even though I only got five of these "right."
One I did get right was "You've always embraced technology." I work every day with CPAs who remain secretly bitter that Excel displaced Lotus 1-2-3, so even this one seems optional.
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“Even liars and hucksters have First Amendment rights”
August 13, 2010
The First Amendment protects you in case you want to give sound tax advice, for a change. My new post at Going Concern.
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IRS: Partners can mix, match their deferred debt forgiveness income
August 12, 2010
The 2009 stimulus bill allowed taxpayers with business debt forgiveness income to defer taxation of the income to a five-year period starting in 2014 (new Sec. 108(i)).
At first glance, you might wonder why anybody would not want to defer income to the hereafter like that. One reason is that insolvent partners can exclude their debt forgiveness income to the extent of their insolvency. If you are insolvent today, you hope not to be insolvent in 2014, so you may want to pick up the income now when you know you won't be taxable. Or, you might have business losses that would enable you to offset the income.
When a partnership has debt-forgivenss income, it allocates the income to the partners on their K-1s for reporting on their own returns; the partners determine whether they are insolvent on their returns, rather than at the partnership level. Unfortunately, the deferral election has to be made by the partnership. That could be a problem if one partner wants to defer while another doesn't.
The IRS issued new regulations for partnerships yesterday allowing the partnership to elect to defer only a portion of that income, and then allocate the deferred portion to the partners that want deferral. An example from the rules shows how the XYZ partnership splits $250 of debt forgiveness income, $100 of which is deferred, that it receives from another partnership:
(ii) XYZ has two equal partners, individuals X and Y. X and Y share equally in XYZ's liabilities. XYZ allocates the $250 COD income amount from PRS equally between X and Y ($125 each). XYZ determines that X has a deferred amount of $100 and an included amount of $25. All $125 of Y's COD income amount is Y's included amount. For 2009, each of X's and Y's share of XYZ's $250 decrease in liability with respect to the reacquired applicable debt instrument of PRS is $125.
This is a very taxpayer-friendly result, but it makes it vital for preparers of partnership returns to work closely with the partners to figure out how much income to defer, and how to allocate it.
The rules give S corporations similar flexibility.
Cite: T.D. 9498. Here's a link to the Tax Analysts version, but it's behind their pay wall. I will provide a link to a public version when I find one.
UPDATE: More from the Journal of Accountancy.
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The Homebuyer Credit: an $8000 subsidy for buying in the spring instead of the summer
August 12, 2010
The inevitable failure of the first-time homebuyer credit was illustrated last month in Des Moines. The Des Moines Register reports:
Home sales in the Des Moines metro area tumbled nearly 50 percent in July from June and fell 42 percent compared with a year ago, the Des Moines Association of Realtors said Wednesday....
The July sales hangover follows a homebuying rush this spring, driven by federal tax credits.
July metro home sales fell to 515 from 1,015 in June and 890 in July 2009. Last month's pending sales climbed 1 percent to 594 over June but fell 35 percent from 916 in July 2009.
So that meant the billions of dollars, the countless hours spent by IRS tracking down fraud and processing the claims for the credit -- it all was wasted. It changed the timing of purchases at great public cost without altering the underlying weakness of the market.
Brennan Buckley, an Iowa Realty spokesman, said the tax credits "pulled a lot of buyers forward," prompting them to buy a home earlier than planned.
Hardly surprising. No amount of fiddling with tax credits will fix the problem.
Related: Two highly-successful stimulus programs
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Maxed out your credit cards? You need more revenue!
August 12, 2010
David Brunori addresses the just-enacted bailout of insolvent states:
But the big beneficiaries of this law will be California and Florida and other states that have enacted draconian tax limitations over the past decades. And that is outrageous. California citizens chose to limit their property taxes and make raising state taxes very difficult. Now the state does not have money to pay its teachers. But why should I, a resident of Virginia -- a state with no tax limits, have to pay for teachers or health care in California?
Why, indeed? But California's problem isn't a lack of revenues, as the Tax Foundation illustrates:
The problem is the spending, starting with an insanely generous public-sector pension system and out-of-control public employee unions.
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RIP, Dan Rostenkowski
August 12, 2010
Former House Ways and Means Chairman Dan Rostenkowski, a key player in the 1986 tax reforms who later served time on corruption charges, has died. Former Joint Committee staffer Dan Shaviro remembers him has "a true statesman and leader." More coverage from the TaxProf and Kay Bell.
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Kansas City attorney gets unwanted review of his tax work
August 11, 2010
A former Grant Thornton attorney who got his start with Coopers and Lybrand in St. Louis will have to tread carefully in providing tax services. A ruling handed down yesterday forbids A. Blair Stover from organizing three specific tax planning schemes. It also tries to keep him from getting too creative with other plans:
Defendant is enjoined from organizing, establishing, promoting, selling, offering for sale or assisting in any financial or tax related arrangement without submitting, in writing to an IRS designee, a detailed plan explaining the financial or tax arrangement and all steps necessary for the arrangement to be legal under the tax code. No such plan shall be implemented by Defendant or with his assistance unless IRS approval is granted or thirty (30) days have passed since Defendant sought approval.
On the positive side, at least any plans he does offer will be government approved, sort of.
The court shut down three structures based on funneling income through "management fees" to controlled corporations defer or eliminate taxes on the income. The plans, according to the Justice Department, cost the Treasury $100 million. Regarding one such plan, using S corporations with Roth IRAs, the court says:
Defendant's reasoning is so specious that he should have known it was wrong. An S corporation is a corporation: it is formed just like any other corporation and must satisfy the requirements of other corporations. The only thing that distinguishes an S corporation from any other corporation is that it has taken the election under subchapter S of the Internal Revenue Code....
Defendant knew or should have known the Roth/S structure was not viable. Many of the reasons have been stated. The initial flaw was in determining that Roth IRAs could own shares in a subchapter S corporation. Corporations may elect to be treated like a partnership for tax purposes, but the underlying premise is that their income will be taxed. Any structure that allowed income to not be taxed was of dubious validity. Defendant decided not to heed Revenue Ruling 92-73 simply because it was a Revenue Ruling he believed was unworthy of acceptance.
While the court is hard on Mr. Stover, it doesn't put him out of the tax business. Sometimes state professional regulators step in after judicial findings; it will be interesting to see whether Missouri regulators take any action.
UPDATE: District Court: First Amendment Prohibits Complete Ban on Lawyer-'Huckster's' Rendering of Tax Advice (TaxProf Blog)
Cite: U.S. v Stover, USDC-WD-Mo, Case No. 08-6018-CV-SJ-ODS
Justice Department press release.
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I hate to say 'I told you so'...
August 11, 2010
...so it's nice of Peter Pappas to do it for me. Thirty-one Congresscritters have signed on to an AICPA effort pushing back against the IRS preparer-regulation power grab. Mr. Pappas points out:
It seems that the IRS, like the U.S. Military, is susceptible to mission creep.What began as an effort to regulate previously unregulated and unenrolled tax preparers has now, as Joe Kristan might have predicted, crept into the regulation of already regulated CPAs, IRS Enrolled Agents and tax attorneys.
- It will eventually apply to everyone. Sooner or later some CPA or lawyer will get in trouble, and the IRS will move to apply to them "the same standards we apply to H&R Block."
No bureaucracy ever thinks it has all the power it needs.
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A defense, of sorts, of rapid refunds
August 11, 2010
"Rapid Refunds" -- loans made by preparers against tax refunds due on 1040s -- are an expensive way to borrow, right up there with payday loans. Yet, reports Kay Bell, they can be the best bad option for a strapped taxpayer:
I still don't like RALs. Too many of the providers of these short-term loans prey on desperate people who end up in worse financial shape because of associated fees and the fact that they just can't pay back the loans, tax refund notwithstanding.Several blog readers, however, quickly let me know that the end of debt indicators will not eradicate RALs. Why? Because the need and/or desire for fast refund money has deeper, more troublesome financial roots.
A thoughtful post, worth reading in full.
Somewhat related: Payday of Reckoning
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Charlie Rangel asks for his dignity back
August 11, 2010
"If I can't get my dignity back here," he said, “then fire your best shot of getting rid of me through expulsion.”
Good luck with the dignity thing, Congressman.
Background: Rangel Hires Accountant to Scrub Tax Returns.
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It's Herbert's birthday again.
August 10, 2010
Iowa's only home-grown president was born 136 years ago today in West Branch.
It's my 50th chance to celebrate Herbert's day.
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Howdy, Jed!
August 10, 2010
From an anonymous commenter on Ezra Klein's Washington Post post, Taxing the super-rich:
AGAIN a family of 5 in rural Iowa making $250,000 a year is Jed Clampett rich.the same family of 5 in NYC is NOT rich.
This could work if Dems were smart enough to separate the rich but alas these are the Dems.
It's hot here today in Iowa. I may take a break and head out to the cement pond.
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The art of tax-free living
August 10, 2010
From the New York Times
In addition to her $877,000 compensation package, Ellen V. Futter, president of the American Museum of Natural History, lives rent free in a $5 million East Side apartment that the museum bought when she came aboard.The Metropolitan Museum of Art houses its director, Thomas P. Campbell, in a $4 million co-op that it owns across Fifth Avenue from the museum.
The director of the Museum of Modern Art, Glenn D. Lowry, may have the best deal of all. In addition to the $2 million in salary and benefits he earned last year, he lives in a $6 million condominium in the tower atop the museum.
But it’s not just the nice — and free — digs: None of these museum heads pay income tax on the value of the [free] housing they receive, which combined would rent for about $400,000 a year.
At return filing time, I'm sure it's a masterpiece.
There are potential tax issues when a charity provides nice housing for its managers.
The most serious is revocation of charitable status if the IRS decides a charity is operating for a private benefit. This weapon is rarely used because it is often a death penalty for the exempt organization.
Congress gave the IRS a less severe and easier-to-use weapon a few years ago: the "intermediate sanctions" rules that penalize "disqualified persons," like managers, if they receive an "excess benefit" from the exempt organization. The tax is 25% of the excess benefit, but can rise to 200% if the "excess benefit" isn't repaid.
The IRS could also assert that the housing might not qualify as tax-free under the rules for tax-free employer housing, even if it isn't an "excess benefit." These rules require the housing to be on-premises, for the convenience of the employer, and a condition of employment.
The IRS might be just fine with the museums' housing policies. In that case, it's up to the donors to decide whether it affects their willingness to continue to provide support.
Hat Tip: Mary O'Keeffe.
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There is such a thing as a bad parking space
August 10, 2010
Brian Gongol points out a fundamental design flaw.
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Iowa proposed regs back away from taxing nonresident partners on investment income
August 09, 2010
Iowa has published a proposed rule that exempts Iowa non-residents from tax on investment income from Iowa investment partnerships. This marks a retreat from the Department's absurd former position taxing non-resident partners on investment income. The the new language is below, with additions to the old rule underlined and deletions struck through (sorry, I haven't found a link):
EXAMPLE G -- A nonresident is a partner in a family investment partnership in which the other partners are members of the same family. The other partners are residents of Iowa. The partnership invests in mutual funds, interest-bearing securities and stocks which produce interest, dividend and capital gain income for the partnership. The partners who are Iowa residents maketheoccasional decisions in Iowa on what investments should be made by the partnership. The distributive share of interest, dividend and capital gain income reported by the nonresident would not be included in net income allocated to Iowa since it was not derived from a business carried on within the state.Jensen, Herman A. & Vineta L., Docket No. 88-20-1-0014, Letter of Findings (1992).
This language still leaves too much room for Department of Revenue mischief. It leaves the door open for the Department to go after partners of more active investment partnerships based in Iowa - a hedge fund, for example. Even New York doesn't go after that. Iowa should make it clear that it won't tax investors in investment partnerships if it really wants a healthy financial sector.
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Which one is the I.D. thief?
August 09, 2010
The one on the left is California real estate billionaire Donald Bren. The guy posing in the bank camera picture on the right apparently opened bank accounts in Donald Bren's name and made off with Mr. Bren's $1.4 million tax refund. Kay Bell has the details.
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It must have rained last night.
August 09, 2010
A lot.
Source: U.S. Geological Survey
UPDATE: More here (3.37 inches of rain at the airport; 5+ in Ames).
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Well, $310 million is a lot of green...
August 07, 2010
In today's Des Moines Register:
State transportation agencies in Iowa and Illinois have submitted a joint application seeking $248 million in federal money to establish daily passenger train service between Chicago and Iowa City via the Quad Cities, Gov. Chet Culver said Friday.
The states would kick in other money -- Iowa would throw in $20.6 million -- to bring the total cost to $310 million for a passenger rail link to Iowa City. But it's not just a train ride:
The new application proposes a "GreenLine" approach that would include environmentally friendly efforts in construction, operation and local development related to the railroad project, Culver said.This includes running the train using biofuels, using recycled materials where possible in construction, using locally grown foods and environmentally friendly packaging in food services, installing "green" station upgrades to reduce utility costs and increase efficiencies, and encouraging pedestrian friendly development around rail stations.
Well, that's one approach. There's another approach that costs approximately $310 million less up front. It was demonstrated in Downtown Des Moines this morning:
Not only does this amazing technology cover the Iowa City to Chicago route, it also goes to Des Moines. It goes all the way from Des Moines to Chicago in approximately six hours - 3 hours 50 minutes from Iowa City. That's approximately one hour faster than the promised Iowa City to Chicago rail time. It costs passengers from $1 to $26 to go from Iowa City to Chicago. That compares to a projected cost of $42 for the train, and operating subsidies from the taxpayer that would likely be at least as much per passenger.
So: we have the Megabus offering energy-efficient twice-daily transportation in under four hours from Iowa City to Chicago for $26 or less, at no marginal cost to the taxpayer. We could spend $310 million to make possible a route that would take an hour longer and cost passengers $42 per trip, on top of a big annual taxpayer subsidy. But for the $310+ million, we would also get a...
...train using biofuels, using recycled materials where possible in construction, using locally grown foods and environmentally friendly packaging in food services, installing "green" station upgrades to reduce utility costs and increase efficiencies, and encouraging pedestrian friendly development around rail stations.
That's a big pile of green. That's why we need to have taxes go up.
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It's a holiday!
August 06, 2010
The Iowa Sales Tax Holiday runs today and tomorrow. Billed as a "back to school" event, it actually applies to all sales of clothing or footwear at a price under $100. The Department of Revenue tax holiday webpage clarifies:
"Clothing" means...* any article of wearing apparel and typical footwear intended to be worn on or about the human body.
"Clothing" does not include...
* watches, watchbands, jewelry, umbrellas, handkerchiefs, sporting equipment, skis, swim fins, roller blades, skates, and any special clothing or footwear designed primarily for athletic activity or protective use and not usually considered appropriate for everyday wear.
As long as you are reasonably thrifty, you can find a nice outfit to wear to go shopping for another state's tax holiday -- for example, the South Carolina sales tax holiday on guns.
Flickr photo by k@t marsh
Kay Bell has a useful list of state sales tax holidays. The Tax Foundation has a useful discussion of why they are bad tax policy.
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Another Aegis trust customer to be reunited with Aegis promoters
August 06, 2010
Funnelling medical practice income to an offshore trust through bogus "management fees" may have seemed like a great idea to Brian Ellefsen, a Carthage, Missouri surgeon, when the nice people from The Aegis Company brought it up. After Mr. Ellefsen was sentenced yesterday to 22 months in prison for evading taxes on $1.6 million of income, the plan looks much less attractive.
His brother Mark, who was the office manager for his medical practice, received a 14-month sentence.
According to a government sentencing memorandum, those Aegis people could be persuasive:
Mark Ellefsen blames his conduct on everyone, but himself. He blames the Aegis promoters for tricking him. He was fooled by their "fancy offices," "limousines," "inches-thick manuals packed with faux legalities," the "tax and trust expert," and claims that Aegis system was what “the nations’s elite families did all the time.”
As the Aegis people are now serving long sentences themselves, the brothers may have the opportunity to get some clarifications from that "tax and trust expert." There are two lessons for the rest of us:
- Limos, fancy offices and lots of paper don't make something that is too good to be true, true.
- Tax plans that promise to let you make your taxable income go away through management fees to controlled offshore accounts are very bad news.
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Rapid refund loans -- gone?
August 06, 2010
The IRS struck a blow to the refund anticipation loan business yesterday. The IRS will no longer provide the "debt indicator" to electronic filing preparers that says whether the IRS might hold back refunds to pay other debts -- say, back taxes or child support.
This makes the high-interest loans riskier, forcing preparers who make short term "rapid refund" loans against tax refunds to find other ways to evaluate taxpayer risk, raise their fees or get out of the business. TaxGrrrl reports that RAL lenders may still be able to do business:
The debt indicator notifies third party preparers about debts, unpaid child support, delinquent student loans or other federal debts. Loan underwriters use this information to determine how much a potential taxpayer might receive after any offset – and in some cases, whether or not to even offer the loan in the first place.Information about refunds and offsets will still be available through the IRS web site. That will assist taxpayers directly but will make the jobs of third party preparers who offer RALs a little more tricky.
Rapid refund loans are normally a bad deal, but not always. If it's a choice between a rapid refund and bounced check fees, the rapid refund is a better deal. In any case, consenting adults should be able to engage in finance, even unwisely, but nothing requires the IRS to help underwrite rapid refund loans.
More coverage from Kay Bell and Christopher Bergin.
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We explain some things to Turbotax Tim
August 05, 2010
My new post at Going Concern.
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Coverage rules bring down doctor's ESOP
August 05, 2010
A Houston Plastic surgeon, Dr. Scott Yarish, got an offer to sell one of his five medical practice businesses. His lawyer, a Mr. Riddle, got to work, recommending an S corporation owned by an ESOP to shelter sale proceeds and other business income, as the Tax Court explains:
He advised Dr. Yarish to form an S corporation to manage his four medical practice entities as well as the medical practice Dr. Pisarki sought to purchase. The medical practice entities would pay a "consulting fee" to the S corporation and then deduct the fees as management services.Mr. Riddle further recommended that the S corporation sponsor an ESOP to defer income earned by the S corporation. It was intended that the income of the S corporation would pass through to the ESOP, and, because the ESOP would be tax exempt, it would pay no tax on the income until it was distributed to the ESOP participant. Dr. Yarish would be the sole ESOP participant. In effect, Dr. Yarish's medical practice entities would divert money to an entity owned by a tax-exempt trust, creating a substantial cash and property benefit solely for Dr. Yarish.
A cunning plan. Unfortunately for the doctor, ESOPs are "qualified plans." To keep employers from funding lavish plans for owners or executives while leaving out other employees, the qualified plan rules have "coverage requirements." These often complex rules require that non-highly compensated employees be covered as well as the big shots, and the testing for these rules is done across related-employer groups. Still, all worked out well, until...
Respondent audited the ESOP after the ESOP terminated. Respondent's examination concerned whether all eligible employees of Dr. Yarish and his medical entities participated in the ESOP. Respondent sought documents from petitioner regarding the ESOP. Petitioner provided respondent with, among other things, a list of related entities and a census of employees in the controlled group or affiliated group. These documents contradicted petitioner's statement in its application that it was not a member of an affiliated service group or a controlled group of corporations under common control.
Now things went badly. The IRS retroactively revoked the "determination letter" stating that the ESOP failed to disclose its affiliated group status when it applied for the letter. That has all sorts of horrendeous potential consequences, including the loss of deductions and civil penalties. The Tax Court upheld the IRS.
The moral? Don't set up a tax-advantaged qualified plan, like an ESOP or profit-sharing plan, with the expectation that you can leave employees out, even by putting the employees in a separate company. When you do set up a qualified plan, work with somebody who does qualified plan work for a living, and make sure they know about all of the business interests of the owners.
Yarish Consulting Inc., T.C. Memo. 2010-174
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Late to the Cavalcade
August 05, 2010
I'm late to notice, but it's not too late for you to catch up with the new Cavalcade of Risk.
The blog world's roundup of insurance and risk management is going strong at Colorado Health Insurance Insider. Among the many fine posts is Insureblog's insight on how Obamacare will make child-only health insurance expensive and rare.
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There are worse things for a CPA than losing a permit to practice
August 05, 2010
David Frieling, the man who, er, "audited" the financial statements of Bernie Madoff's Ponzi palace, has been stripped of his CPA license in New York. That wouldn't be so bad if it weren't for the 100-year prison sentence that may follow.
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New York Congresscritter: tax the rich, just not my rich
August 05, 2010
TaxProf has the details.
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Asking the right questions
August 04, 2010
While the politicians battle over extending the expiring Bush-era tax cuts, Howard Gleckman says they're having the wrong fight:
Instead of reprising their partisan, tiresome, and largely unproductive argument about what to do with the Bush tax cuts, President Obama and Congress ought to be asking a very different question: How do we build a tax system capable of generating the revenues we need to fund the government we want in the most efficient and fair way possible?
He goes on to pose some important questions that our leaders don't want to think about. Read the whole thing.
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What are they smoking?
August 04, 2010
There's often confusion on the burning edge of the tax law. That's so with the issue of whether you can claim federal tax breaks for the cost of medical marijuana. Paul Caron reported yesterday on published IRS guidance saying that as long as pot is illegal for federal purposes, state-sanctioned medical marijuana is non-deductible, and non-reimbursible under HSA and flex-spending plans.
Today, Iowa State's Roger McEowen blows a big fragrant cloud of smoke at the issue by informing the TaxProf of a letter sent by the IRS to Sen. Chuck Schumer of New York that seems to say otherwise:
I am responding to your letter, dated March 3, 2010, on behalf of your constituent, _____, [who] asked whether the cost of an herb prescribed by her doctor to treat migraine headaches qualifies as a medical care expense for purposes of her health care flexible spending account. ...The cost of an herb may be an expense for medical care if the taxpayer can substantiate that he or she:
* Has a medical condition (disease, illness or injury);
* Is purchasing the herb to treat or alleviate the medical condition;
* And would not have purchased the herb “but for” the medical condition.
The Schumer letter, though, coyly doesn't say what the "herb" at issue is. I suspect the IRS has a different view of deductions for, say, St. John's wort than it has for marijuana.
Meanwhile, Brett Trout has smoking hot coverage of the related intellectual property issues.
UPDATE: More from TaxGrrrl.
Flickr image courtesy Chuck "Caveman" Coker under Creative Commons license.
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What to do when you lose the audit lottery
August 04, 2010
It's only natural to get a bit nervous when the IRS reaches out to touch you. TaxGrrrl has some sound advice for taxpayers who receive an audit notice, including this:
So I’ll throw in a third thing: a neutral party like an attorney can make your life much easier. I’ve had a number of clients who have dug themselves deeper into trouble just based on the “freak out” factor. That’s when a client gets worried about the audit and gets overly defensive – then they either say too much or not enough to the IRS. Even worse: the client stops answering IRS altogether. That’s the worst thing that you can do.
I've seen taxpayers end up spending thousands of dollars unwinding IRS troubles that could have been solved with a prompt response to the first IRS inquiry. Respond the first time, on time.
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Dog Days Carnival
August 04, 2010
It's hot, it's stormy, it's a good day to slide on over to Kay Bell's place for the latest Carnival of Taxes!
There's nothing cooler that the latest and greatest tax posts from around the blog world.
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Expiration of Bush-era tax cuts will cost average middle-income Iowan $1,616
August 03, 2010
The Tax Foundation reports that the federal tax bill of the average middle-income family in Iowa will go up over $1,600 if the Bush-era tax cuts expire as scheduled December 31.
There must be some mistake. We've been hearing that those tax cuts only went to "the rich." But the Tax Foundation says that is the affect their expiration will have on the average family in the middle 20% of the income distribution:
By the term "average middle-income family," we are referring to the average of the families in the middle 20 percent of the income distribution. This is different from the "average family," which would have a much higher income level than the "average of the middle-income families," given the skewed distribution of income.Technically, we analyze the difference between the average tax bill under both expiration and extension for the middle 20 percent of families within each state and congressional district. Note also that by using "family," we have restricted the universe to those arrangements with two or more people. In other words, singles are excluded from this analysis, whereas any married couple family (with or without children), single parent family, or household with related people living together is included. A more detailed methodological summary is provided at the end of the report.
For my congressional district, IA-3, the average savings for the average middle-income family is $1,639.
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Only $200 million in Iowa subsidies for Hollywood? Well allright, then!
August 03, 2010
Well, it could have been worse.
Iowa officials now say the maximum possible liability for the taxpayers under the scandal-wracked Iowa Film Credit program is down to $200 million or so. It had been projected as high as $330 million.
That means each of Iowa's roughly 3 million residents is sending an involuntary check of $66.67 to Hollywood. That's $200 million dollars that could have paid about 5,000 teachers for a year. It's money that won't repair flood damage, or help you pay down your mortgage and credit card, or stretch your savings a little further while looking for a job.
But think of what you get for your $200 million:
But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.
So maybe you can get a temporary job as a driver or waitress for a cast party. Even if you can't, you might see a star! Think of the excitement! Isn't that worth more than that music program your school district had to close to save money?
Related: Starlets or teachers?
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It doesn't affect most businesses. Just most business income
August 02, 2010
As most businesses nowadays are pass-through entitites -- S corporations or LLCs -- the scheduled increase in the top individual rate to 39.6% will inevitably increase taxes on business. Supporters of the tax increase say that's just dandy. For example, William Gale argues in the Washington Post (hat tip: Kay Bell):
This claim is misleading. If, as proposed, the Bush tax cuts are allowed to expire for the highest earners, the vast majority of small businesses will be unaffected. Less than 2 percent of tax returns reporting small-business income are filed by taxpayers in the top two income brackets -- individuals earning more than about $170,000 a year and families earning more than about $210,000 a year.
As worthless statistics go, this is definitely one of them. As we noted awhile back, this 2% number comes by counting every schedule C for every part-time moonlighter, Amway salesman, hobby farmer and vacation home renter as a "small business." A successful manufacturer or service business is counted the same as your office Mary Kay seller.
Things look different if you look at the share of small business income that the tax increase will hit. Using 2003 statistics -- the most recent available -- 3% of small businesses had gross receipts over $1 million, but these 3% had 78% of small business receipts and 64% of the small business net income. That means the tax increase hits most of the economic activity of small businesses. It affects the successful businesses, the ones that are growing and are able to hire people. That's a much more important measure than the percentage of Schedule Cs that are affected.
Related: It's not just luck.
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Unintended consequences, little cigar edition
August 02, 2010
One reason tax increases always disappoint politicians is that taxpayers don't just sit still and take it. They change their behavior in often unpredictable ways to keep their money.
Iowa jacked up its cigarette tax by $1 per pack. So Iowa is suddenly becoming a land of cigar smokers, reports KCRG.com:
Filtered cigars that resemble cigarettes in appearance, if not taste, are fast gaining appeal with smokers struggling under budgets strained by tobacco tax hikes.For $1.28, shoppers at the Cigarette Outlet, 1404 First Ave. NE, could pick up a pack of 20 Wrangler brand filtered cigars last week, one of several brands available.
The filtered cigars come in a 20-pack about the size of a cigarette package, and are similar in appearance. But they cost $2.48-per-pack less than one of the more popular budget cigarette brands, Hy-Val. They’re priced a stunning $4.30-per-pack less than Marlboro, one of the mainstay cigarette brands after tax.
Naturally Iowa will respond with a "loophole closer" for filtered little cigars, setting the stage for the next round of taxpayer innovation.
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Charlie, Rangeled?
August 02, 2010
Former head House taxwriter Charlie Rangel totters to his political destruction. From a tax policy standpoint, that's not necessarily a good thing, as he at least realized that U.S. corporate tax rates are a problem. His successor doesn't seem to have a clue. Still, you can't have your taxwriters blowing off their own filing responsibilities or shaking down constituents.
Christopher Bergin reports that President Obama is nudging Rep. Rangel out the door. TaxGrrrl thinks he'll take the hint. The TaxProf has a roundup.
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Truckin'?
August 02, 2010
Bruce the Missouri Tax Guy posts a handy tax guide for truckers. It's full of good information, starting with the advice "keep immaculate records."
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