I hear that a new "coupling" bill is moving through the Iowa legislature on a fast track as an amendment to SF 512, the indigent defense appropriation. It reportedly has just passed the House Ways and Means Committee. I haven't seen it; I'm told it doesn't couple with bonus depreciation, but it couples to the federal Sec. 179 $500,000 limit for 2010 and 2011. I will update as soon as I learn more.
UPDATE, 5:00 PM: Senate is adjourned until Monday, so no final vote until then, at least. I will try to find out if it's a done deal, but that's my guess now.
UPDATE, 4:40 PM: SF 512, with coupling amendment, passes House, 98-0. This thing must really be on a fast track. Now back to Senate for approval with amendment.
UPDATE, 3:00 PM: Code conformity language. Language does make $500,000 Sec. 179 retroactive to 2010, but doesn't couple for either 2010 or 2011 for bonus depreciation. We'll watch this and update this post for any new developments.
Little kids learn the easy magic words, "please," "thank you," and "you're welcome." At least they used to, before "no problem" crept into the language (excuse me, did I imply that there was a problem when I thanked you?).
The tax law has harder magic words, and forgetting them can be costly. When you make a charitable contribution of $250 or more, the tax law requires the recipient of the gift to provide "contemporaneous written acknowledgement: of the gift with the following information:
- The amount of cash and a description (but not value) of any property other than cash contributed.
- Whether the donee organization provided any goods or services in consideration, in whole or in part, for the property, and
- A description and good faith estimate of the value of any goods or services
An Alabama couple donated a "facade easement" on a building to a local charity, claiming a $705,000 charitable deduction. Unfortunately, the charity failed to properly acknowledge the gift, and the IRS disallowed the deduction. Things went to Tax Court, where the judge looked over the agreement with the charity:
The only statement in the agreement concerning consideration is the statement that the commission provided consideration of $10 plus other good and valuable consideration. Whether or not it be considered boilerplate and whether or not it be considered in conjunction with the merger clause, this statement does not indicate that the commission provided no goods or services. And if the statement be construed literally to mean that the commission provided the stated consideration, then the agreement fails the requirement of section 170(f)(8)(B)(iii) since it does not include a description and good faith estimate of the "other good and valuable consideration".
Consequently, we agree with respondent that the agreement does not satisfy the requirements...
Did the Tax Court cut some slack for a paperwork foot fault? No:
For the reasons explained above, we conclude and hold that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law disallowing the disputed deductions for petitioners' failure to obtain a contemporaneous written acknowledgment of the facade easement.
The Moral: If you want to claim a charitable deduction for 2010 and the charity hasn't acknowledged your gift with the magic words listed above, hound them. Your deduction fails without them.
This is another of our 2011 filing season tax tips. Stop by for more through April 18!
On April 12, we'll have worked enough to cover our tax bills for 2011, and we can start putting some money in our own pockets. That's the calculation of the Tax Foundation, anyway:
Tax Freedom Day® will arrive on April 12 this year, the 102nd day of 2011. That means Americans will work well over three months of the year, from January 1 to April 12, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels.
For Iowans, Tax Freedom Day is April 6 this year, reflecting our lower-than-average total tax bill. Mississippi has the earliest Tax Freedom Day, March 26, while Connecticut is last, on May 2.
Of course, for tax preparers, our freedom comes April 19, when we get our next day off.
An alert reader points us to a Tax Court document where Walter Anderson agreed that his IRS deficiency for 1998 and 1999 is $141,497,773, not counting penalties of $105,984,341. The agreement says there is no deficiency for the prior three years.
Mr. Anderson was pleaded guilty in what was billed as perhaps the largest individual tax evasion case ever. After the plea, there was a dispute over whether Mr. Anderson would have to pay the taxes. That seems to be settled. Since he has claimed he is indigent, the actual amount may be academic.
Mr. Anderson was a telecom entrepreneur with an interest in space travel. Owing the IRS $247 million, not counting interest, may keep his feet on the ground for awhile, even after he finishes his prison term.
Of course, Iowa has yet to resolve its depreciation and Section 179 rules for 2010.
Did you turn 70 1/2 last year? Tomorrow is the deadline for taking the minimum required distribution from your retirement account, the Smartmoney Tax Blog reminds us.
The IRS yesterday issued eagerly-awaited guidance on bonus depreciation (Rev. Proc. 2011-26). Key bits:
- You will be able to elect 50% bonus depreciation, rather than 100%, for assets qualifying for the 100% bonus -- but only for the tax year that includes September 9, 2010.
- It confirms that projects started as late as January 1, 2008 can qualify for 100% bonus depreciation, if placed in service between September 9, 2010 and December 31, 2011. This will be good news for farmers with new building going into service after last September 8.
- The IRS provided a "safe harbor" that solves the "zero second year depreciation" problem for cars subject to 100% bonus depreciation.
"Bonus" depreciation allows you to deduct an extra part of a fixed asset in the year it is placed in service. The part of property not qualifying for bonus depreciation is recovered over a period of years, usually five or seven years. With "50% bonus" depreciation, you deduct half of the cost in the year you place an asset into service, and you deduct the remaining cost under the usual depreciation rules. With "100% bonus," the entire cost is deducted in the first year.
A new 2011 Ford Fiesta listed for $16,977 at Stivers Ford Lincoln Mercury. This car can qualify for 100% bonus depreciation, subject to the "luxury auto" limits.
With cars, it's more complicated. The so-called "luxury auto" rules limit annual depreciation of cars. The limit is adjusted annually for inflation. It kicks in for cars costing around $15,300 and up (you can find the current limits here). As a nod to bonus depreciation, the first-year "Sec. 280F" limit was increased to $11,060 for 2010 and 2011.
A technical reading of the luxury auto rules says that if you take "100% bonus" depreciation for a car, you get the $11,060 in year 1, but then you get no more depreciation until year 7. The new IRS safe harbor allows taxpayers to make a special computation that allows them to take depreciation in years 2-6 also, up to the usual annual Sec. 280F limits. The safe harbor computations are confusing, but the bottom line of thenew guidance is that you get full 280F-limited depreciation starting in year 2 for cars with costs starting around $18,450. The computation for cars costing less than that is more puzzling, but you do get year 2-6 depreciation. (Cars are "five year" property, but because the car is normally considered to be placed in service at the mid-point of the year, the depreciable life goes into a sixth year).
While welcome, the "luxury auto" safe harbor seems like a long way to get home. The IRS apparently agreed with the "second year zero" reading of the tax law. Rather than ignoring the implied Congressional malpractice, IRS made up a whole new funky depreciation rule to get around the problem. While it's hard to see where the Code says they can do that, nobody is likely to complain.
The Tax Policy Blog yesterday pointed out that the TV show "Sarah Palin's Alaska" received a $1.2 million film tax credit subsidy from the state of Alaska:
In case you missed it, small government crusader and Tea Party favorite Sarah Palin's TLC reality show "Sarah Palin's Alaska" received a $1.2 million subsidy from the state of Alaska. The show spent $3.6 million on production in the state, meaning that Alaskan taxpayers covered a third of the cost of the show.
Tax Update readers know how I feel about film subsidies. They've been an embarrassing debacle in Iowa. Yet I don't find it evil that people take advantage of subsidies that the government stupidly leaves lying around. If there were an Iowa tax credit that paid 25% of my tax return prep costs, I'd be right there.
The problem isn't that Sarah Palin (or the production company) took the subsidy. My problem is that she signed the thing into law in the first place. No sane person believes that she signed the subsidy with the idea that she would be able to take advantage of it -- if she did foresee the improbable events that made her famous, she's much smarter than her critics would ever give her credit for. It's not an issue of corruption. It just that it makes no sense to take money from your taxpayers to fund Hollywood.
Unfortunately, Governor Palin has way too much company in the state houses, as this wonderful animated map from the Tax Foundation shows:
Just this week the Republican Governor of Utah signed a renewal and expansion of his state's film credit. When even "small government" candidates support such a blatant corporate welfare giveaway, it shows how hard it will be for fans of small government to make progress.
UPDATE: Palin Responds to Film Tax Credit News. From her statement:
I can't speak for what other states do, but Alaska's film production tax credit program is an effective way to incentivize a new industry that would diversify our economy. It worked. The lawmakers' successful legislation fit Alaska's economy, as our economy is quite unique from other states' due to our oil and gas revenue. Perhaps it would behoove people to learn much more about the 49th state's young economy before making broad accusations about the efficacy of business programs.
Smartmoney Tax Blog explains what to do:
Your main defense is to launch an investigation with the IRS, which will work to confirm your identity, track down the fraudster and recover your refund. Each incident has a different outcome, but most taxpayers should expect to wait at least six months for the case to be resolved, according to Identity Theft 911.
But don't jump to the conclusion that your refund has been stolen. It takes six weeks or so to get a paper-return refund, and up to three weeks when you e-file. Check the IRS "where's my refund" site before you panic.
It's better to pay your taxes with a credit card than to not pay them at all, but a guest-poster at TaxGrrrl's place explains that it can be a dangerous habit.
There's no news to report from the Capitol on the impasse over Iowa's fixed asset cost recovery rules for 2010. Last week I was told that if they didn't fix it by last Thursday, it could drag on, and that seems prescient.
While they can't tell us how to do our 2010 Iowa tax returns yet (heck, it's not even April -- why are we so antsy?), they can sure spend it. The Iowa Department of Revenue has released its latest "Tax Credits Contingent Liabilities Report." Some highlights:
- In the last full fiscal year, 23 tax credits awarded by various state agencies added up to almost $182 million.
- For 2008, the last full year for which they have published statistics, Iowa awarded over $81 million in "refundable" tax credits. If you have refundable tax credits in excess of your tax for the year, the state writes you a check for the difference. The only difference between this and straight-up corporate welfare is that no legislative appropriation is needed to collect a refundable tax credit.
- The "Historical Preservation and Cultural and Entertainment District" tax credit has gone through the roof, with awarded credits rising from $15 million in 2009 to $50 million in 2010.
- Just five credits - the Historical credit, the High Quality Jobs Program, the Industrial New Jobs Training Program, and the two Enterprise Zone program credits -- add up to $145 million in 2010. If that has fired up an Iowa economic revival, it's an invisible one.
- When you count all of the tax credit programs, including the economic developments programs, research credits, earned income tax credit, and ethanol and biodiesel promotion, Iowa ran up a $243 million tab in fiscal 2010.
And it doesn't look like it's going to get much better:
Rather than running hundreds of millions in futile tax credits through the economic development bureaucracy, Iowa ought to try something different -- let us keep our money and invest it without their help. The Quick and Dirty Iowa Tax Reform Plan is ready to go!
Winter's officially over, but Winter doesn't know that yet. With fresh snow on the ground, it's a great time to head inside and enjoy Kay Bells newest Carnival of Taxes!
So heat up the last of your hot chocolate and curl up with the best of the rest of the tax blog world!
The Justice Department reports that it has shut down a peddler of tax delusions in Kansas City. Gerald A. Poynter II has been permanently enjoined by a federal judge from preparing returns and promoting tax scams. From the Department of Justice Press Release:
The court found that Poynter, who uses the business name “Jerry Love Ministries” prepares false Internal Revenue Service (IRS) forms to help his customers claim fraudulent tax refunds based on phony reporting of large income tax withholding. The court order states that Poynter’s scheme is a version of the repeatedly rejected "redemption" scheme used by tax defiers to evade tax obligations or obtain wrongful financial benefits. According to the court, proponents of that scheme claim that the U.S. government is in possession of money rightfully owned by taxpayers. The court found that Poynter told his customers that he could recover that money for them for a fee, and that he then generated fraudulent IRS forms to support false tax refund claims on their behalf.
If you believe the government has a big pot of cash just sitting there with your name on it, and that you can crack into it with the right tax forms, you probably have a basement full of stuff you bought watching late night infomercials, too, and you know those six-pack abs will be there any day now.
Link: Court order
Leona Helmsley notwithstanding, the standard issue tax cheater is a young man, according to a survey reported by the Associated Press:
Sixty-four percent of those who admitted cheating on their taxes were men, while 55 percent were under 45, according to a new survey by DDB Worldwide Communications Group.
But there is a trait that they are likely to have in common with the late Leona:
Compared to those who play by the rules at tax time, far more tax-cheaters said they’re "overall better people," and that they’re "special and deserve to be treated that way."
In my fortunately very limited exposure to real criminals, low self-esteem has not been their problem. They seem to think that the rules shouldn't apply to them, and anything that happens to them is not because they are crooks, but because they got a raw deal. It's not surprising that tax crooks are the same way.
Via Peter Pappas.
The tax law allows you to deduct interest on up to $1.1 million of debt on a principal residence. The IRS is good enough at math to tell that 5% of 1.1 million is $55,000. If you are deducting more than that in home mortgage interest, the IRS is likely to ask just how much debt you have, reports Arden Dale at Smartmoney Tax Blog:
Tax rules distinguish between two kinds of home debt. There is home acquisition debt, which is a loan used to acquire, construct or substantially improve a qualified home, and is secured by the home. Then there is home equity debt, which is any other kind of loan that is also secured by the home...
IRS guidance last June helped set the rules straight. The agency said acquisition loans over $1 million may also qualify as home equity indebtedness. Now, says Labant, it is clear the taxpayer can deduct interest on the full $1.1 million, even if he has only one loan. The development, she adds, is “good news for taxpayers.”
Many taxpayers misunderstand the rules for home-equity debt. You can deduct interest on up to $1 million of acquisition debt. If you just borrow against an existing house without using the money for improvements, you can only deduct interest on up to $100,000 of that "home equity" debt -- and it's not deductible at all for computing alternative minimum tax.
The Tennessee Tax Guy has more.
A Missouri preparer draws the line:
In order to allow adequate time to prepare your tax return, we need your tax return information in our office before April 4th. This is to make sure that your return is not hurried or rushed leading up to the deadline. For returns received on or after April 4th, an extension will probably be necessary.
A lot of taxpayers have their information in, but they are waiting on K-1s that will arriving in the next week or so. Others are coming back with follow-up information that we need to finish their work. Those returns get finished before those that don't even come in until April.
You don't want your return rushed out just to beat the April 18 deadline (and it is April 18 this year). Your preparer is likely to be swamped and tired. Far better to have a rested pair of eyes looking at your information a little later. And no, there is no evidence that extending increases your chance of being audited.
Kay Bell reports that in the last government fiscal year 2.1 million tax returns claimed $15.6 billion in first-time homebuyer tax credits. That $15.6 billion was supposed to fix the market for houses. How's that working out? Smartmoney Tax Blog has the results:
Two and a half years later, sales in most residential markets are still anemic and prices are still falling.
The real estate gurus at Case-Shiller expect more bad news: prices could fall another 15%-25%.
Just last week we got headlines like: New home sales plumb record lows, prices stumble
Targeted tax credits normally fail. The failure is usually less spectacular.
This easy, reports Russ Fox:
* It is organized or domiciled in California;
* Its [California] sales exceed the lesser of $500,000 or 25% of total sales;
* Its [California] payroll exceeds the lesser of $50,000 or 25% of its total compensation; or
* Its real and tangible personal property exceed the lesser of $50,000 or 25% of the entity’s total real and tangible personal property.
California has one of the more onerous and complicated tax systems out there. They also have one of the worst fiscal crises. Those things could be related.
David Brunori ($link) reports:
Last year Minnesota gave out $7 million in tax credits to investors who helped finance start-up companies. The payoff: 47 jobs. The state says the Minnesota angel tax credit program is just getting started and that it's too early to make any judgments. All I know is the state paid out $148,936 for each job it created. I think the new jobs weren't paying quite that much.
It's probably worse than that. There's no way of knowing how many of those "jobs" would have been created anyway. Economic development bureaucrats are notorious for claiming credit for any new hire in the neighborhood of a corporate welfare payment.
States can't force job growth by throwing checks around. They can make a good environment for businesses to grow with low tax rates, an easy-to-comply-with tax system, and light-handed regulation.
Different day, same story. The Iowa General Assembly conference committee trying to reconcile House and Senate bills with differing depreciation rules has now gone two weeks without figuring out what Iowa's tax law is for the returns we are working on now.
Both bills adopt the federal $500,000 Section 179 deduction limit retroactively to 2010. The House Bill adopts federal bonus depreciation for 2010, while the Senate bill adopts it only for 2011. If neither bill passes, the 2010 Iowa Section 179 deduction would be $134,000 and there would be no bonus depreciation on Iowa returns.
The main sticking point in the GOP insistence on creating a tax relief fund that would capture surplus dollars at the end of each fiscal year and earmark them for tax reductions. House Speaker Kraig Paulsen, R-Hiawatha, said legislative Republicans tentative had worked out their agreements but Democrats still were not on board, although he thought negotiators were "very, very close" to finalizing a package. However, Senate Majority Leader Mike Gronstal, D-Council Bluffs, told reporters "I think we’ve made progress but I wouldn’t say it’s close."
If they can't agree on whether they are close, they may not be very close.
Excellent advice from Lifehacker on sending confidential information to your tax preparer electronically:
If for some reason an in-person hand off isn't an option and you really want to send your sensitive documents over the internet, you still have options for making that transfer more secure. Here are a few things to keep in mind:
* Don't send your sensitive documents over email. It may seem private, but even if you're using an email account that uploads attachments over a more secure HTTPS connection, like Gmail, you have no control over your recipient's server, and they may download your attachment from an unencrypted HTTP connection. Now say they did that from a public Wi-Fi network. Things just got very un-secure.
* If you're set on transferring the files digitally, you should encrypt them (which you can do using one of these tools). Using a tool like 7-zip, for example, you could create a password-protected archive (with super-strong AES-256 encryption). You would still need to give your tax preparer the password to your encrypted archive, which you wouldn't want to do over email for the same reason you wouldn't want to send the files as attachments.
* Share your documents using an encrypted file-sharing service. A lot of file-sharing services offer some sort of encrypted transmission for file sharing.
Roth & Company, like most tax pros, uses a secure web portal service to swap documents with clients. Contact your tax pros to learn how to use their portal service.
Via the TaxProf
The Feds have indicted a New Hampshire IRS agent for trying to help himself to the Homebuyer Credit cookie jar:
An eighth individual, Michael Doyle, 44, of Hudson, NH, was also indicted for filing false, fictitious and fraudulent claims with the IRS and faces the same penalties. The indictment of Doyle alleges that he was a long time employee of the IRS who falsely claimed to have purchased his home in 2008 in order to obtain a tax refund by claiming the First-Time Home Buyer Tax Credit, even though he had purchased his home in 2007 and therefore wasn’t eligible for the stimulus related benefit.
But we can be highly confident that tax preparers who go through IRS-authorized continuing education and send $65 to Accenture for a PTIN won't have these problems. After all, IRS supervision keeps people from getting the tax law wrong.
Related: Smartmoney Tax Blog, Why the Homebuyer Credit Didn’t Work
UPDATE: The TaxProf has more.
It turns out the article is talking about the federal Research Credit, first enacted in 1981 and extended for a year or two at a time by every subsequent administration. Maybe headline space was just too tight to call it the Reagan-Bush-Clinton-Bush-Obama Tax Credit.
Iowa's tax law rewards persistence, but you have to have a lot of it. Iowa allows you to exclude from taxable income capital gain from real property used in a trade or business if you have both held the land for ten years and have "materially participated" in the business for ten years. The exclusion can also apply when you sell your business.
A policy letter released this week shows that even if you have ten years' worth of persistence, you might not win. Iowa lays out the facts:
Your scenario involves a taxpayer who is a 50% owner of a limited liability company that purchased commercial real estate in Cedar Rapids in 1999. The property consisted of five acres, of which three acres included a large commercial building and two acres consisted of vacant land. The building was leased to several tenants and the vacant land was never rented out. The taxpayer's participation in the rental business constituted substantially all of the participation in the rental business. In 2010, the two acres of vacant land was split off and sold, and the limited liability company still owns the building and the three acres. You are asking if the sale of the two acres of vacant land qualifies for the Iowa capital gain exclusion.
Iowa said that the vacant land wasn't "used in the business," so the exclusion was unavailable.
This continues a long-time trend at the Department of interpreting gain eligibility narrowly.
A lobbyist tells me of rumors that the Ieadership of the Iowa General Assembly is "almost there" in settling differences between the House and Senate on Iowa's fixed asset cost recovery rules for 2010 and 2011. Both houses have passed bills allowing the federal Section 179 deduction limit of $500,000 retroactive to 2011. The Iowa House would also allow bonus depreciation for 2010, but the Senate would only allow it for 2011.
If there is an agreement, it is likely to be announced today, as they hate to work on Friday under the Golden Dome. We'll let you know if we hear anything.
UPDATE, 10:50 am: Sen. Majority leader Gronstal wouldn't say conference "is close" to a deal, per Kathie Obradovich's Twitter feed. Boo. Hiss.
UPDATE, 11:22 am: Kathie Obradovich tweets that House Speaker Paulsen says they're "v.v. close." If they can't even agree on how close they are, that may not be a good sign.
Image courtesy of Wikipedia
If you owe the IRS and are having trouble paying, you aren't supposed to try to make it back by day trading. Janet Novack has the details:
Later, when Tucker tried to settle his growing tax debt through what is known as an offer-in-compromise (OIC), the IRS turned him down on the grounds that he had “dissipated” through day trading assets he could have used to pay his tax bill in full. In his opinion here, Tax Court Judge David Gustafson concluded that Tucker’s “foray into day trading was purely speculative” and that the IRS was within its rights to deny the OIC.
Dissipation has been the result for every client I have who's tried day-trading. On the plus side, they all have nice capital loss carryfowards.
The TaxProf has more.
Another hard life lesson learned, this time in Missouri, where a CPA has pleaded guilty to charges of embezzling $300,000 from clients:
Prosecutors said two families — one from Springfield, the other from Rogersville — placed trusts under Hubbard's control. One designated four charities as the beneficiaries of a woman's life savings. The other was supposed to fund the educations of a man's heirs and relatives.
Hubbard admitted keeping most of the money for himself, spending it on cars, farm equipment, travel and other items.
Farm equipment? That's sick, but not as sick as stealing from clients in the first place.
CPAs aren't really trained to be trust custodians. They don't have the oversight of a bank trust department, and sometimes the temptation turns out to be too much.
Mr. Smart is charged with stealing funds from prepaid funeral trusts in Michigan and Tennessee, and not paying taxes on the stolen funds.
So what if the weather is cold again, and there's snow in the forecast? Just heat up the Weinermobile and drive on in to the new Cavalcade of Risk!
The one and only roundup of Insurance and risk management blog posts is at My Personal Finance Journey this week. Hank Stern from InsureBlog is there, as usual, this time with coverage of the new federal long-term care coverage program, and its discontents. No, I didn't know it existed either.
One of my favorite bad tax ideas has resurfaced, reports Jim Maule:
A bill introduced a few days ago by Representative John Lewis proposes a new tax break...
Under the proposed legislation, a person who creates a book, a song, a mural, a painting, a sculpture, or some other “literary, musical, artistic, or scholarly composition” and who donates it to a charity will be entitled to a deduction even though the person does not include anything in gross income.
Mr. Maule, a tax professor and prolific author on tax topics, thinks this is unwise. True. But as I said years ago, if you can't beat 'em, join 'em:
You say, "my, what a stupid idea. Every two-bit parking-lot artist is going to go to fly-by-night appraisers and donate their unsold stuff for huge tax deductions." Precisely! And that's where my retirement fund enters the picture.
If you are going to donate your art to charity, somebody has to accept it. Hence, my new career as Curator of the Digital Museum of Deductible Art. Longtime readers may remember that this idea died when the Iowa state legislature failed to pass SF 132, which would have tried a similar idea at the state level.
For a nominal handling fee and exclusive rights, our museum would accept and display digital art donated by artists around the world. Incredibly capable appraisers would ensure
laughably generousscrupulously accurate valuations of donated work. For example:
Because I need a wasteful subsidy to fund my retirement!
The conference committee appointed March 8 to reconcile the bills to determine Iowa's 2010 depreciaton rules has gone more than two weeks without figuring things out. Meanwhile thousands of Iowa business returns are either piling up waiting for them, or are being filed knowing that the conference committee might well make the returns retroactively wrong. Attorneys who defend the indigent meanwhile scramble to buy groceries because they aren't getting paid by the state while the impasse lasts.
The decision may have been taken out of the conference committee's hands. This post from O. Kay Henderson implies that the legislative leaders have taken over the process. If they have, they seem to be in no hurry.
That's not to say the legislature isn't doing anything. They're busy trying to make Iowa's tax law worse. The Senate Ways and Means Committee yesterday approved "An Act providing income tax credits for the construction and installation of solar energy systems and wind energy systems, and including effective date and retroactive applicability provisions" Because Iowa's dozens of existing tax credits need company.
There's a better way.
Related: No resolution of Iowa tax impasse
Rappers seem to have tax problems at a rate rivaling strip club owners. Russ Fox reports that Ja Rule is the latest victim of the tax man:
Ja Rule is a famous rapper (well, famous in the world of rap). He also followed the tax practice that income after tax should be the same as income before tax. When you’re famous, that’s not a good idea.
Jeffrey Atkins (Ja Rule’s legal name) was the sole stockholder of two corporations. They paid him royalties from his music tours and from royalties (from sales of his music). That income neglected to make it to his tax returns from 2004 through 2008 (because he apparently didn’t file). That’s a great idea only if you get away with it…and he didn’t.
Mr. Atkins pleaded guilty to three counts of failing to file a tax return. The Department of Justice press release notes that the loss to the government is “…approximately $1,137,912.”  Mr. Atkins has agreed to file accurate tax returns and pay his back taxes (and penalties and interest).
What does rapping have in common with strip clubs? Perhaps cash.
State defined benefit pension plans are careening to their doom. What are California's unions doing to make sure that their pensions plans remain solvent? They are making sure the actuaries assume unlikely rates of investment return:
Actuaries got another rebuff this week when the labor-friendly CalPERS board voted to leave its earnings forecast unchanged, much like a CalSTRS board action in December that did not lower its forecast as far as actuaries recommended.
A lower earnings forecast raises pension costs for state and local governments struggling with budget cuts during a deep recession. But another rate increase also might fuel the drive for pension reforms that increase worker costs and cut their benefits.
"I was afraid we were going to throw gasoline on the fire in the public pension debate," Neal Johnson of the Service Employees International Union told a CalPERS committee after a key vote.
The actuaries wanted to lower the earnings forecast from 7.75% to 7.5% (likely optimistic in itself) -- and only for the next 10 years, with earnings pegged at 8.5% for the following decade. How reasonable is that?
Replying to a question from a board member, Dan Dunmoyer, advocating a lower forecast, the CalPERS chief investment officer, Joe Dear, said CalPERS has never earned a two-decade average as high as 8.5 percent in the past.
David Cay Johnston says defined benefit plans are just fine, and it's not the unions' fault anyway. Here's a piece of data otherwise. But remember, my data doesn't count, as Mr. Johnston points out: "The reality is you have no facts to back up your positions, do not know the history of these matters and write from what you imagine to be facts."
The conference committee charged with resolving the impasse in Iowa's 2010 depreciation rules did nothing yesterday. While negotiations may be going on amount statehouse leaders, no news came out for the thousands of Iowa taxpayers who don't know what depreciation rules to use in preparing their 2010 tax returns.
The Iowa Senate did take a step backwards in tax policy yesterday, but unfortunately it is a backwards step. The Senate passed SF 506, a bill to give a refundable Iowa tax credit equal to 25% off the federal tax credit for businesses with up to 25 employees and an average compensation level of under $50,000. The credit would take effect for 2011.
Refundable credits are bad policy to begin with because they are a temptation to fraud, as our experience with the Earned Income Credit and the Homebuyer Credit illustrate. This credit is also a bad idea because it amounts to the state telling businesses how they should compensate their employees.
But the worst aspect of this complicated credit, from a policy standpoint, is that it imposes a back-door tax on employers who hire more employees or increase employee cash compensation. The credit phases out 1/15 for each new employee you hire starting with your 11th employee, and is gone entirely when you get to 25. The credit also phases out as average compensation exceeds $25,000. That makes the credit function as a tax on new employees and on employee raises -- an idea so obviously bad that it was approved by the Senate on a 48-0 vote.
Link: Des Moines Register coverage.
The Tax Policy Blog reports that America's top 10% of taxpayers pay more taxes, relative to their share of national income, than in any other OECD country:
The ratio for U.S. households is 1.35, far greater than the ratio of taxes to income in any other country. Even in the three countries with a comparable distribution of income, the ratio of taxes to income was less, 1.18 in Italy, 0.84 in Poland, and 1.20 in the U.K.
Interestingly, countries with top personal income tax rates that are higher than in the U.S., such as Germany, France, or Sweden, have ratios that are closer to 1 to 1. Meaning, the share of the tax burden paid by the richest decile in those countries is roughly equal to their share of the nation's income. By contrast, we prefer to have the wealthiest households in this country pay a share of the tax burden that is one-third greater than their share of the nation's income.
That won't appease those who feel that any money left in the hands of high-income taxpayers is too much. It will probably seem irrelevant to David Cay Johnston, who likes to point out that at the very top of the income scale -- the top 1/10th of one percent -- the effective tax rate is much lower.
I like to point out that the low rate at the top of the income scale is an artifact of the lower capital gain rate, that it doesn't count the double taxation of corporate income, and the fact that people usually get to the very top of the income scale once, when they sell their business or some other big asset in capital gain transactions. But Mr. Johnston says "The reality is you have no facts to back up your positions, do not know the history of these matters and write from what you imagine to be facts," so my facts don't count.
The TaxProf has more.
The leftish think tank Good Jobs First has a new report featuring the Iowa Research Activities Credits among ten state tax policies that amount to "ineffective programs that provide subsidies to corporations."
The report describes the Research Credit:
State R&D tax credits are common, and they usually are not among the most controversial subsidy programs. Iowa, however, is one of only a handful of states that make such credits refundable, meaning a company receives a cash payment for any year when its credits exceed its tax liability. This increases and accelerates the cost of the program and increases the state's risk of never breaking even (other states instead allow companies to carry unused credits forward). In 2010 the state paid out more than $44 million in such refunds. RAC has been around since 1985, but it was not until 2005 that the state began tracking the credits and evaluating their effectiveness. A 2008 report by the Iowa Department of Revenue reached some startling conclusions
• Although about 150 firms filed RAC claims each year, just ten were receiving, on average, 82 percent of the RAC dollars. :
• Of the total RAC credits claimed by corporations, 92 percent consisted of cash refunds.
• An attempt to measure the economic impact of the credits was inconclusive.
The report rips other state subsidies run through tax laws, including the Michigan Film Credit program.
The Iowa program issues checks to some big corporations. The state's recent report listing recipients of over $500,000 in research credits included this table:
It's hard to imagine the General Assembly voting a $14 million straight-up cash subsidy to Rockwell Collins, but this credit amounts to the same thing.
Trying to grow Iowa's economy by writing checks to companies is hopeless. Real growth occurs from the ground up, in an environment that doesn't require consultants and lobbyists to milk the tax law for benefits to offset punishing tax rates. The Quick and Dirty Tax Reform Plan would provide that a lot better than the Iowa Research Activities Credit.
Related: Weekend update: Iowans, we don't subsidize just Hollywood
The Tennessee Tax Guy explains the tax rules for employee business expenses.
Tax Analysts reports ($link) that the IRS likes the way it is beating up on inadvertent non-compliance with foreign account reporting requirements just fine. At least that's so if John McDougal, special trial attorney and division counsel in the IRS Small Business and Self-Employed Division, is representative:
Taxpayers do not like how the government defines reasonable cause. "The difference between reasonable cause and no reasonable cause has always been whether the taxpayer was aware of the facts that gave rise to the filing obligation," McDougal said. "If they were not aware of the facts, that's reasonable cause. If they were aware of the facts, but just didn't bother to check it out or ask the question whether they had a filing obligation, the case is pretty clear that's not reasonable cause." He said that their representatives need to think about how much knowledge the taxpayer had of the facts and when that knowledge was acquired.
So a U.S. citizen living overseas who knew she had a bank account, but had never heard of FBAR reporting, would have no reasonable cause for not filing the forms she never had heard of.
The Tax Analysts piece adds a wrinkle I had not heard of: the IRS is adding the value of offshore real estate to the value of offshore accounts in computing penalties on offshore account holders:
However, the 25 percent penalty in the OVDI is applied to the value of real estate if it produced unreported income subject to U.S. tax during 2003-2010. Mark E. Matthews, a partner at Morgan, Lewis & Bockius LLP, said he thought the focus on real estate seemed odd in the context of a program that is about offshore accounts. He noted that in many cases taxpayers had no reporting obligations for the real estate.
Kenneth Vacovec, a partner at Vacovec, Mayotte & Singer LLP, said that he disagreed with the inclusion of real estate in the OVDI because, unlike financial accounts, there is no separate reporting obligation for foreign real estate holdings. He said that the offshore penalties seemed especially inequitable when applied to real estate that was inherited or purchased for retirement and that was included in the OVDI solely because it produced a small amount of rental income. Because the value of the real estate generally exceeds the value of any income that it produces, taxpayers are facing large bills for minor tax reporting violations, he explained.
Mr. Matthews says the IRS habit of shooting jaywalkers -- even when they come in voluntarily under the so-called FBAR amnesty programs -- makes it hard to recommend using the new version of the amnesty:
"It is very difficult to talk to those people and make a compelling case for them to come into this program," Matthews said. He explained that lawyers are faced with the prospect of telling these clients that the cost of entering the OVDI will be "basically a quarter of their net worth," due to the inclusion of their real estate holdings in the penalty base.
It's sad when the government offers you the alternatives of living under a cloud, financial ruin, or giving up your citizenship.
Related: Jaywalkers flee the gunfire
A agent for basketball players put up a brick with his taxes, reports Russ Fox:
Mr. Peake ran Peake Management Group, Inc. in suburban Maryland. Mr. Peake’s profits after-tax were the same as they were before tax, and that doesn’t work (especially when the IRS finds out). From 2000 through 2007, Mr. Peake “neglected” to file his tax returns. Adding to his tax evasion, he moved $5,836,940 from his business account to various personal accounts in other names. He structured payments (made payments in cash of amounts less than $10,000 so as to avoid currency reporting), paid personal expenses from business accounts, and generally just did his best to avoid paying tax.
The trouble with that strategy is that when it fails, it usually fails spectacularly. It did here.
On Friday, Mr. Peake pleaded guilty to one count of tax evasion and one count of conspiring to commit bank and wire fraud
Federal sentencing guidelines would indicate a 41-51 month sentence.
Considering the example set by their agent, it wouldn't be surprising if some of Mr. Peake's athlete-clients turn out to have their own tax troubles.
As most readers don't check back on old Tax Update posts for comments (and bless you if you do), I'll call attention to the back-and-forth between me and Pulitzer-prize winning tax beat writer David Cay Johnston on the merits and evils of defined benefit plans.
My view is that defined benefit plans are a time-bomb for government finance, as the actuarial games available to politicians and their confederates in public-employee unions are an irresistible temptation to understate liabilities and funding at the expense of future taxpayers. I cite the near-extinction of defined benefit plans in the private sector as evidence that they don't work well.
Mr. Johnston insists that defined benefit plans work better in theory, and the problems they face in practice are just the work of evil administrators and poorly-designed regulations. It reminds me a little of the kids I knew in college who insisted that even though Communism had never worked so far, that's only because it just hadn't been done right.
By returning to the wise practices of the Happy Days era, where our parents happily drove to work for 40 years at the engine plant, DB boosters imply, we can again have secure monthly checks to help us buy our unfiltered cigarettes after retirement.
Except the golden age wasn't. Megan McArdle points out that the nostalgia for DB plans is misplaced, pointing at this from Andrew Samwick:
My colleague Jon Skinner and I made that comparison in an article in the American Economic Review. The result was that the projected distributions of retirement income were surprisingly similar under the old-style DB plans that were dominant in the 1980s and the 401(k) plans that supplanted them in the 1990s, assuming workers were covered by the same plan over a long career. (The comparison was better for 401(k) plans when workers switched jobs -- vested deferred benefits under DB plans are often quite low.)
In truth, this should not really come as a surprise. The amount of retirement income that will come from pensions is determined by workers' willingness to give up current earnings for current pension contributions, regardless of whether they are making the contributions directly or the employer is (allegedly) contributing for them. If 401(k) plans are proving to be inadequate, it is because we are a nation of inadequate savers, not because we had a great system of DB pensions that we no longer have.
The problem, Samwick concludes, is not that we used to have fantastic defined benefit plans, and now we don't--DB plans also take big hits when the market falls, and though they do have a government backstop which 401(k)s don't, they also make a mid-career job loss utterly catastrophic. So there's no clear winner on the security side.
Even under Mr. Johnston's idealized scenario, DB plans only work with large stable employee bases. But the "dream" of getting a factory job out of high school and working at the same place for 40 years is a pipe dream in the modern economy, where changing jobs every few years is much more common than staying in place for a long time.
As for Mr. Johnston's defense of such plans in the public sector, the unfolding public defined benefit pension disaster speaks for itself. It's hard to find comfort in assurances that the theory works when the practice has been catastrophic.
The conference committee trying to reconcile the different "tax coupling" bills passed by the two houses of the Iowa General Assembly has now gone a full week without finishing its work.
Meanwhile, thousands of Iowa business tax returns are in limbo, awaiting the word on what rules apply for 2010. The House bill conforms Iowa's tax law for bonus depreciation and the Section 179 deduction to the federal rules effective for 2010. The Senate bill adopts federal Section 179 rules for 2010, but bonus depreciation for 2011.
Many business returns already filed could be affected by the conference decision; these returns might have to be amended to comply with any retroactive tax law changes.
The bills in conference also include "supplemental appropriations" for several state programs, including indigent defense. Attorneys for paupers are scrambling to pay their bills; prosecutors, in contrast, won't miss a paycheck.
The hangup is a proposed bookkeeping account to hold any surplus state funds after the end of the budget year. Republicans want the account to get all surplus funds after reserve funds are restored, to be used for general tax reduction. Democrats want a limited effective date, with only 25% of the surplus to be set aside, and only for property tax relief.
The Governor entered the debate yesterday. In a town hall meeting in Columbus Junction, he came out for splitting the non-contentious issues from the bill so they can be enacted without more delay, reports Kathie Obradovich:
Branstad today, at a town hall meeting to promote his jobs plan, came down on the side of Democrats who want to push through the $45.7 million needed for human services, corrections and indigent defense.
“Since the House and Senate can’t agree on those other things, let’s just pass the things that are essential for now,” Branstad said. “So we can pay the indigent defense bills. So that we can meet the obligations of the people who are in the corrections system and the mental-health institutes. And then work out the other issues where philosophically we have these big differences, before the end of the session.”
This is another example of the Republican House acting independently of the Republican Governor. Earlier the House passed a 20% across-the-board individual rate cut. They haven't acted on the Governor's proposal to halve Iowa's highest-in-the-nation tax rate and increase the tax on casinos.
Rep. Tom Sands, the House Ways and Means Committee chairman, was in the audience. He said after the meeting that House Republicans feel they’ve already conceded on some issues that were important to them. He said supporters of the Taxpayers First Fund will lose leverage if they allow it to be separated from efforts to fill budget holes.
“We feel at this time we should not give on the Taxpayers First Act, because this is something we campaigned on,” he said. “I understand the urgency of getting some of that other stuff passed, but all of it is important.”
Branstad said he understands that, but he added: “I have the most leverage of anybody, because I have the veto.
What happens now? A lobbyist yesterday told me that if the conference fails to reach a deal this coming Monday, the impasse may continue indefinitely. The lobbyist said the most likely resolution on the tax deals is coupling with Section 179, but not bonus depreciation, and the Section 179 coupling may not be retroactive. If it is not, the Section 179 deduction -- which allows businesses to deduct currently fixed asset costs that would otherwise have to be capitalized and depreciated -- would be limited to $134,000 on 2010 Iowa returns. The federal limit for 2010 is $500,000.
Bonus depreciation allows taxpayers to accelerate deductions for new property placed in service in 2010 -- 50% of the cost, plus the normal depreciation, for property put in service before September 9, and 100% of the cost for property placed in service after that date. Failure to conform would leave Iowa businesses under the old regular rules for tax depreciation.
If they would just embrace the Tax Update's Quick and Dirty Tax Reform Plan, they would never have to have this silly debate.
On the federal rules:
The IRS has issued (Rev. Rul. 2011-10) the minimum required interest rates for loans made in April 2011:
-Short Term (demand loans and loans with terms of up to 3 years): 0.55%
-Mid-Term (loans from 3-9 years): 2.49%
-Long-Term (over 9 years): 4.25%
The Long-term tax-exempt rate for Section 382 ownership changes in April 2011 is 4.55%.
The conference committee attempting to determine whether to conform Iowa to federal rules for fixed asset cost recovery failed to reach agreement again yesterday. The committee is hung up on a plan to put any leftover money at the end of the fiscal year into a "tax relief fund." Rod Boshart reports:
Talks stalled when House Republicans insisted on creating a tax relief fund with 100 percent of the state’s yearly ending balance flowing into the account, while Senate Democrats wanted to move ahead with $45.7 million in supplemental spending needs and tax “coupling” provisions that would conform Iowa tax laws with federal changes but hold back the tax relief fund to allow for more discussion.
Rep. Scott Raecker, R-Urbandale, a committee co-chairman, said he did not believe the panel was approaching an impasse but he added “we’ve probably made less progress today than we’ve made in other days. At least it’s still continuing the conversation.”
On Wednesday, legislative Democrats agreed to accept a GOP call for creating a special fund designed to capture surplus state dollars for tax relief. However, they significantly restricted the amount of excess revenue that would flow into the account - from 100 percent to 25 percent - insisted the tax relief be earmarked solely for property tax reductions and would start the fund effective in fiscal 2014 rather than next year.
You know, guys, it would sure be nice to be able to finish 2010 returns.
The conference is attempting to resolve the House-approved "tax coupling" bill, which would conform Iowa's Section 179 deduction and bonus depreciation rules to federal rules for 2010, with the Senate bill, which would allow bonus depreciation only starting in 2011. If no bill passes, Iowa will have a $134,000 Section 179 limit for 2010, vs. the federal $500,000 limit on deductions for fixed asset costs that are otherwise capitalized and depreciated over a period of years.
When Irvin Hannis Catlett Jr. gets out of federal prison, he'll be about 81 years old. Will the 210 months -- 17 1/2 years -- cause him to lose his taste for the tax prep business?
Mr. Catlett did amazing thing for his clients' tax returns, according to a Department of Justice Press Release:
According to testimony at the nine day trial, Catlett operated Tax Resolutions Inc. located in Laurel, Md. He falsely held out Motors Holding Company Inc., Motors Holding Company II through VI Inc. and Rentown Inc. to his clients as operating businesses involved in automobile leasing and sales. Catlett knew however that these entities were not engaged in automobile leasing and sales, nor in any other legitimate, profit-making business. From 1999 to 2009, Catlett worked with others to sell to clients purported “investments” in the tax shelter entities. These investments were payments to Catlett for the purchase of bogus tax losses, purportedly generated by the tax shelter entities’ automobile leasing operations. Catlett, Walter Cullum and James Unterreiner prepared fraudulent tax returns for their clients that included the fictitious business losses, thereby reducing the amount of taxable income and total tax reported by the clients, and resulting in the clients falsely claiming refunds from the IRS.
No doubt none of this would have happened had he sent $64 to Accenture to get a PTIN. After all, IRS supervision prevents corruption. Oh, wait:
Trial testimony further showed that Catlett paid Mark Hunt, an IRS revenue officer, for providing Catlett with IRS taxpayer information on Tax Resolutions’ clients and for allowing Catlett to introduce Hunt to clients and potential clients as Catlett’s connection at the IRS, in order to assure them that the tax returns prepared by Tax Resolutions would not be the subject of adverse IRS actions.
But requiring law abiding preparers to take "competency exams" and IRS-sponsored CPE will put a stop to all this, for sure.
While Warren Harding may have been the first president to file a return under the modern income tax that took effect in 1913, he wasn't the first to pay income tax. That dubious honor belongs to Abraham Lincoln, who paid the income tax imposed to help pay for the Civil War. Joseph Thorndike reports:
Ancestry.com publishes a database of tax assessor records from the Civil War era. Back then, federal assessors from the Bureau of Internal Revenue (forerunner of the IRS) were required to assemble comprehensive lists of taxpayers, their incomes, and their taxes due...
But anyway, who do you think turns up on the assessor's list for the District of Columbia in 1864? None other than Abraham Lincoln, with a listed residence of ""White House" and a reported income of $25,000. He paid $1,296 in taxes, thank you very much.
It's not a tax return, so I can't be certain that Harding has been usurped in the category of "first to file." But it's almost as good.
Old Abe didn't take Woodrow Wilson's cheap dodge of claiming that he was constitutionally exempt from the tax. Score one for Abe.
The third meeting of the conference committee to determine Iowa's depreciation rules for last year broke up without agreement yesterday. They plan to get together again today.
The Iowa House of Representatives passed a bill that would adopt the federal bonus depreciation rules and Section 179 rules for 2010. The Iowa Senate passed a bill that would adopt Section 179 for 2010, but put off bonus depreciation on Iowa returns until 2011. That means we still don't know what rules will apply to recover the cost of fixed assets on Iowa returns that we are trying to prepare now.
Why the hang-up? The sticking point is a special fund to earmark budget savings for tax relief. Rod Boshart reports:
Under the Democratic offer, the Legislature would create a new tax relief fund to receive 25 percent of excess money in the state’s economic emergency fund once the state’s separate cash reserve funds are full. Excess revenues that flowed into that account would be used to provide property tax relief as determined by the General Assembly, said Bolkcom, a conference committee co-chairman and leader of the Senate Ways and Means Committee.
GOP legislators have pushed for a special fund that would capture 100 percent of surplus revenue in the general fund’s ending balance each fiscal year that would be returned to taxpayers. For the current fiscal year, projections call for more than $300 million to be unencumbered by June 30.
It's just bookkeeping screwing up the filing season, then. Surely you think this would be easy enough to work out. That means you just don't appreciate nuance. Conference committee member Scott Raeker:
“We’re really getting into some of the nuances of this right now. But at least on the bigger picture items I believe we’re in alignment and we can work this out is my opinion.
Fine. They've already honked up accrual-basis federal corporation returns that were due Tuesday, where the deduction for state taxes accrued couldn't be determined because state law was up in the air. Maybe the legislature can get this figured out before the April 15 1040 deadline, anyway.
But the legislature is dealing with important stuff. Why just the other day a House Committee approved SF 130. What does that bill do?
This bill allows a resident of this state who is under 16 years of age to accompany the minor’s parent or guardian, or any other competent adult with the consent of the minor’s parent or guardian, while that person is hunting raccoons without obtaining a fur harvester license so long as the minor does not hunt or carry a firearm or weapon of any kind.
Glad they're focused like a laser on the big picture.
Celebrate the passing of the March 15 tax deadline, and some ethnic holiday, at Kay Bell's new Carnival of Taxes!
There's lots of green cash goodness at the blog world's roundup of tax coverage. Better than green beer, any day.
Not if you get the cash. If you do a like-kind exchange properly, though maybe you can. Details from Paul Neiffer at Farm CPA Today.
Remember, you have to have the exchange set up properly before you close. Paperwork details are crucial.
Maybe subsidized ice hockey in the desert. Going Concern has the details.
The conference committee trying to reconcile the 2010 coupling bill passed by the two houses of the Iowa legislature failed to close the deal yesterday. They are meeting again this morning. Rod Boshart reports:
Sen. Joe Bolkcom, D-Iowa City, said he was pleased the House was receptive to the Senate approach to conform the state tax code to federal changes -- which would provide $152 million in tax relief but would not implement most changes retroactively for the 2010 tax year as Republicans had proposed.
I understand that the current offer would couple Iowa's law with the federal law's $500,000 Section 179 deduction limit would be retroactive to 2010, but bonus depreciation would not apply for Iowa tax purposes until 2011. The Section 179 deduction enables taxpayers to immediately deduct expenses that would otherwise be capitalized and deducted over multiple years through depreciation or amortization.
The remaining issues apparently are non-tax related:
[House Republican negotiator Scott] Raecker countered that providing an extra $20 million in state funding for mental-health service but setting a deadline to revamp the current system would help spur legislative action, noting that "without the repeal, I don't think you get people to the table to get something done." He also said Republicans were insisting on the tax relief fund as a way to "put the taxpayer at the table" whenever lawmakers make state budget decisions.
The federal 2010 corporation return deadline has come and gone, and we still don't know what Iowa's tax rules are for last year. Get on the stick, guys.
When I was a youngster visiting relatives in Iowa, I remember watching the grownups have to sign for booze at the primitive state liquor stores. You can buy liquor, beer and wine in Iowa grocery stores now, but Iowa still makes it painful, with the third-highest wine excise tax in the U.S.
Map courtesy The Tax Policy Blog. Click to enlarge.
We've talked about how the IRS is gleefully beating up on overseas Americans for accidental violations of the foreign bank account reporting rules. You'll be glad to know that they also shoot resident alien jaywalkers in the U.S. for the same trivial violations. Phil Hodgen has the scoop.
Maybe you pay that fresh-faced young accountant a fair salary, but if you are cheating on your taxes, the IRS can pay her a lot more. The IRS has just awarded a tipster $1.1 million for blowing the whistle on an Enron tax shelter, according to AccountingToday.
The IRS has dragged its feet in making whistleblower rewards under a new tax whistleblower program enacted in 2006. It's not clear if this reward is an anomoly, or whether the IRS is ready to start rewarding snitches. Accounting Today reports that this whistleblower is a bit shy:
The whistleblower, a Wall Street banker who has chosen to remain anonymous to protect his job and career, received the maximum reward of 15 percent. The announcement of the reward was made by the law firm that represented him, Phillips & Cohn LLP.
We'll see whether the whistleblower can maintain his secret identity. Even if he can't, it the math can look good if you have a big enough pelt to bring into the IRS. If a 25-year old has to choose between his $50,000 staff accountant job at a big firm and a $1.1 million check from the IRS, that career in public accounting could seem pretty disposable.
Update: The TaxProf has more.
While it pulled into the station a few days ago, it's not too late to hop on the new Cavalcade of Risk!
Colorado Life Insurance Insider hosts a great roundup of insurance and risk-management posts -- including a wonderful post about how government insurance regulation helps enable testosterone-crazed young men to buy high-horsepower cars.
A study by three Iowa State University economists says that Iowa's high marginal tax rates are a productivity killer:
The economists found that because of the taxes, businesses have less money to spend on capital investments that are critical to attracting the most skilled labor prospects, who then opt to go elsewhere for employment. And because of that compounding effect, the study reports that Iowa's tax structure ranks 48th and last in the continental United States in terms of adverse effects of its taxes on labor productivity.
Iowa's highest-in-the-nation corporation tax comes under fire from Peter Orazem, one of the study's authors:
"The state of Iowa has the highest marginal corporate tax rate at 12 percent, with the next highest state's rate being 9 percent," he said. "The corporate rate raises very little revenue and damages labor productivity. They raise relatively little revenue because firms will want to earn their profits elsewhere because the rate is so high."
He targets Iowa's loophole-ridden system:
"And everyone who doesn't get one of the special deals is paying a higher rate to pay for all those who do. In my mind, the mistake the state is making is that rather than simply reducing the corporate tax rate, we should be broadening the tax base by eliminating all these special deals while lowering the marginal tax rates for everyone."
You know, that prescription sounds a lot like the Tax Update's Quick and Dirty Iowa Tax Reform.
This is a welcome counterpoint to pundits and think tanks who like to say that Iowa's high corporation tax isn't a problem because it doesn't raise much money. That's not a defense of the system, as far as I'm concerned; it's a further indictment of it.
Link: Text of Study
The Senate Ways and Means Committee yesterday was considering SF248, a bill to match the federal small employer health care credit with an additional Iowa credit starting in 2011.
The federal credit is a horrendously complicated piece of work that phases out as you get more than 10 employees, or as their average compensation exceeds $25,000. The bill would match it with a credit equal to 25% of the credit. The flowchart below illustrates it:
It sounds like a nice gesture, but it really amounts to the government telling employers where and how they should compensate their employees, while punishing employers who add to their work force or give their employees raises. Iowa would do better to use whatever revenue would be lost to this to just cut tax rates.
Via Phil Hodgen, another glorious story of how the crusade against international tax cheats is ruining the lives of normal U.S. citizens living abroad. Because you can't slap international tax criminals on the wrist without shooting the jaywalkers.
Related: Jaywalkers flee the gunfire
Warren Harding has had a rough time from historians -- so rough that few remember that he was a reasonably popular president in a time of peace and prosperity, whose death in office was widely mourned.
The Tax Foundation yesterday provided a hint of why he may have been mourned:
Today marks the anniversary of the first U.S. President filing an income tax return. On March 14, 1923, President Warren G. Harding filed his income tax return for the 1922 year, paying about $17,000 in tax on his presidential salary of $75,000, although further details were not released.
The income tax had been enacted in 1913, but then-President Woodrow Wilson was protected by Article II, Section 1 of the Constitution, which states that the President's salary "shall neither be increased nor diminished during the Period for which he shall have been elected." From the 1860s until 1939, it was held that a new tax or tax increase diminished salary, and thus could not go into effect for presidents and federal judges (judges have a similar provision protecting them).
The New York Times of February 15, 1921 reports that then-President-elect Harding spoke against a proposed bill that would make the President permanently immune from the income tax, effectively killing it.
Woodrow Wilson was a monstrously bad president, and his convenient invocation of the constitution to exempt himself from the income tax he gleefully imposed on everyone else is typical. Not only did President Harding subject himself to the same tax law as the rest of us, he freed Wilson's political prisoners.
Tomorrow is the deadline for filing or extending corporation returns. If you owe, you'll want to set up your payments on EFTPS, the Electronic Federal Tax Payment System, today. Remember, the old Form 8109 deposit coupons no longer work.
Even if you don't have a balance due -- like a typical S corporation -- you want to make sure you file or extend your return by tomorrow. The penalty for filing an S corporation 1120-S is $195 per month or part month that the return is late. That means it costs $1,950 to file a 10-shareholder S corporation even one day late.
Electronic filing is the safest way to file. If you must go postal, be sure to use Certified Mail, Return Receipt Requested so you can prove you filed on time. Get that hand-stamped receipt.
Phil Hodgen reminds us that the little-known Form 3520-A, disclosing U.S. ownership of foreign trusts, is due tomorrow -- with severe penalties for late filing. Don't think you have a foreign trust? Phil says you might be surprised:
Schoolteacher saves for years. Retires. Buys a condominium in Baja California. The condominium is owned through a Mexican trust called a “fideicomiso” because the Mexican constitution says that foreigners aren’t allowed to own real estate too close to the coastline.
This is a “foreign trust” and you have filing requirements with the IRS. Form 3520-A is one of them.
U.K. citizen sticks money into an ISA for years and years. Immigrates to the United States. Guess what? That ISA is a “foreign trust” and Form 3520-A (and perhaps other things) will be required in the USA for tax purposes.
Australian citizen sticks money into a superannuation account. Immigrates to the United States. Same result: Form 3520-A and maybe other stuff will be required.
Penalties for late filing start at $10,000, even for filing a day late. Why? Because you can't slap international tax evaders on the wrist if you don't shoot the jaywalkers.
Remember Richard Hatch, the first "Survivor" winner who went to jail for not paying taxes on the $1 million he won on TV? Well, he's going back to jail for the same thing, reports Taxdood:
You’d think Hatch did a lot of thinking while serving his time. You’d think he would formulate a plan to set his life straight upon release. Well, you thought wrong.
A year and a half after his release from serving time for filing a false tax return, Hatch was back in court in December 2010 for failing to amend the tax return that he was previously convicted of falsely filing.
Yesterday, he was sentenced to nine months in prison, and must surrender to the U.S. Marshal by noon this Monday, March 14.
I understand that he's in the middle of another reality show gig, and this will get in the way. Too bad, so sad.
The Des Moines Register reports that the legislators trying to reconcile the separate bills passed by the houses of the Iowa General Assembly are so far too busy preening to tell us what the tax law is for the returns we are trying to prepare right now:
House Republicans said they don't want that tax break in the bill they're trying to reach a compromise over, saying it should be part of a larger discussion about a 20 percent income tax cut for all Iowans...
Gronstal pointed out that thousands of low-income working Iowans don't have any state income tax liability and instead get money back — so it's false that they would benefit more from the 20 percent cut.
"An across-the-board cut of zero tax gets them nothing. And it shocks me they're that stupid," he said, referring to House Republicans.
That must be more of this "new civility" we keep hearing about.
"Stupid?" House Majority Leader Linda Upmeyer said during a separate meeting with reporters later.
"Is just one of us stupid or are all 60 of us stupid?"
Actually, as we still don't know what Iowa's tax laws are for 2010 2-1/2 months into 2011, taxpayers could be forgiven for thinking it's all 150 of you, in both parties.
Both bills would retroactively boost the maximum 2010 Iowa Section 179 deduction from $134,000 to $500,000 for equipment that would otherwise have to be depreciated. The House bill would adopt the federal bonus depreciation rules starting in 2010; the Senate would adopt them only for 2011.
More coverage at Easterniowagovernment.com.
Now that the Obama administration decided to not defend the Defense of Marriage Act, which prevented the tax law from recognizing same sex marriages, the question arises: can Iowa's same-sex married couples file joint returns?
While the administration isn't defending DOMA, it still is statutory law that has not yet been overturned. This advice in the Smartmoney Tax Blog is sensible:
Because DOMA is still the law of the land (however weakly it might be enforced), a married same-sex couple is still considered unmarried for federal tax purposes. Therefore, for 2010, I advise same-sex married individuals to file separate federal returns as singles. Then to protect your tax position in the event that DOMA is overturned, consider filing an amended joint return for 2010 using Form 1040X. You also can consider filing amended joint returns for earlier tax years that are still "open" (a year is generally "open" for up to three years after the date you filed your Form 1040 for that year). Talk to your tax pro about the advisability of filing amended returns. The potential tax savings may or may not be worth the trouble.
As many traditional married couples can testify, being married isn't always a good thing at tax time. Two earner couples often have a higher tax burden filing joint returns than they would filing single returns.
Related: complete Tax Update film credit coverage.
The Freakonomics blog approvingly cites the power-grabbing IRS Commissioner, Doug Shulman:
Now, the IRS may be doing even fewer audits, thanks to political efforts to cut the agency’s budget. In fact, "IRS Commissioner Doug Shulman told the committee Tuesday that the $600 million cut in this year’s budget would result in the IRS collecting $4 billion less through tax enforcement programs."
Does the IRS really get $6.66 back for every dollar spent on new agents? Obviously the IRS would get approximately zero revenue if it had no agents, but at some point you reach diminishing returns by hiring IRS agents. The government clearly couldn't get rid of a 1.4 trillion budget deficit by increasing the IRS budget by $210 billion, even if it wanted to.
Not all IRS spending is equally effective. For example, the massive displacement of IRS resources required by Commissioner Shulmans efforts to assert control over tax preparation will not raise any revenue, other than the fees charged to pay Accenture to give us all new identification numbers.
Most of the recent IRS exams I've seen lately have been poorly chosen. They have audited widows, elderly couples on Title 19, and corporations recently audited with no changes. They have asserted wacky penalties with no basis against compliant taxpayers participating in their so-called offshore "amnesty," in a program that seems to be off the rails.
Perhaps the IRS budget cuts are a hint to the Commissioner to spend IRS resources more carefully. Maybe they could put more effort into chasing actual tax cheats, rather than bothering widows and regulating law-abiding preparers.
Postage stamps expressing undying love for the IRS to sell antivirus software:
This may be right up there with a "I love my mortician" ad campaign. Or, maybe, "CPA=Glamour!"
Via Going Concern
The tax law allows an itemized deduction for "casualty losses" not covered by insurance, to the extent they exceed 10% of your adjusted gross income. A taxpayer yesterday learned that it doesn't apply to casualties that you inflict.
A taxpayer ran over a pedestrian while driving, and the victim later died of the injuries. The taxpayer had to pay a $250,000 wrongful death settlement that apparently wasn't covered by insurance. They deducted the payment as a casualty loss. The taxpayer, whose last name is Pang, said the payment was the result of a casualty, after all -- the casualty suffered by the poor pedestrian. The Tax Court said that the tax law doesn't mean that kind of casualty:
The Pangs maintain, however, that their $250,000 settlement payment is deductible under section 165(c)(3) as a casualty loss because Webster's Dictionary defines "casualty" as "[l]osses caused by death, wounds" and the accident victim's death in December 2002 was certainly a casualty.
This issue is resolved not by Webster's definition of "casualty" but by the Code's provisions for "casualty loss" quoted above. Moreover, the Pangs' position conflates two distinct things -- the victim's casualty (which occurred when he died in 2002) and the Pangs' financial loss (which occurred when they made their payment in 2004)4 -- and does not explain how the "casualty" of the victim results in a deductible "casualty loss" for the Pangs under section 165.
This Court has held that "physical damage or destruction of property is an inherent prerequisite in showing a casualty loss." Citizens Bank of Weston v. Commissioner, 28 T.C. 717, 720 (1957), affd. 252 F.2d 425 (4th Cir. 1958). The Court of Appeals for the Ninth Circuit, to which an appeal in the present case would lie, likewise requires physical damage to the taxpayer's property as a prerequisite to a casualty loss deduction... As a result, although the death of the pedestrian was certainly a "casualty" in the general sense of the word, and although one could say that the Pangs suffered a subsequent economic "loss" when they paid the wrongful death settlement, we cannot hold that Congress intended such a payment to be a "casualty loss" within the meaning of section 165(c)(3).
Decision for IRS.
The Moral? Make sure your auto or umbrella policy covers this sort of thing; The tax law won't help you with the cost of racking up a body count.
Cite: Pang, T.C. Memo. 2011-55
UPDATE, 3/11/2011: The TaxProf has more.
The IRS has shut down another tax prep firm for allegedly fabricating deductions and credits. That's not unusual, but there is a twist this time:
A federal court in Providence, R.I., has ordered that Michael Brier, the owner of the tax return preparation firm Refunds Now Inc., and his employees, Jeffrey Sroufe, Esther Santiago and Carmen Miranda, be permanently barred from preparing federal income tax returns for others, the Justice Department announced today. The permanent injunction order, to which the four individuals consented, applies to them personally and doing business under the names Refunds Now Inc., RNTS Inc., FTIRS Inc., POTIRS Inc. and IHIRS Inc.
The famous Carmen Miranda was "the Brazilian firecracker who mangled her English dialogue and caused all sorts of plot complications in some memorable 20th Century Fox musicals. " This one mangled tax returns instead.
From a report by the Treasury Inspector General for Tax Administration:
Although CI [IRS Criminal Investigation division] took steps to strengthen controls over its equipment inventory, TIGTA’s new audit identified continued weaknesses. CI management did not properly conduct annual inventory reviews, update its inventory database to include all purchases of investigative equipment, conduct required security reviews, or restrict access to investigative equipment to authorized personnel. …
TIGTA visited CI headquarters and three field offices and physically verified a sample of investigative equipment items against the equipment database. TIGTA could not locate or find proper support for 23 or approximately 9% of the items valued at $82,326. Further analysis showed that 11 of those 23 items could not be located because they had been disposed of without adequate documentation.
Peter Pappas, IRS: "Where the Hell Did we Put Those Guns?"
It's unusual for a taxpayer to take this much trouble to do something really dumb:
Petitioners claimed dependency exemption deductions and an EIC [earned income credit] for two minor children on their 2004 return. In support, petitioner attached a birth certificate for each child to the return. The attached certificates were forgeries, and the children did not exist. Petitioner has conceded that he did not have any children in 2004. Petitioners are not entitled to dependency exemption deductions with respect to C.W.H. and C.B.H.
Petitioners attached to their return a Schedule EIC, Earned Income Credit, showing C.W.H. and C.B.H. as qualifying children; their year of birth as 2004; and that each child "died" during 2004. The children, however, did not exist in 2004. Clearly, petitioners are not entitled to an EIC with respect to C.W.H. and C.B.H.
As a result of the foregoing, we sustain respondent's determination of the increased deficiency.
The Moral? If you don't have a legitimate dependent Social Security number, generating a phony birth certificate on your inkjet printer and attaching it to your 1040 won't get you that deduction. It will attract unwanted IRS attention.
GlobeGazette.com reports that the members of the committee to work out the differences between the "code coupling" legislation passed by the two houses of the Iowa General Assembly have been named:
House conferees are Democratic Reps. Dave Jacoby of Coralville, Tyler Olson of Cedar Rapids and Republican Reps. Nick Wagner of Marion, Scott Raecker of Urbandale and Erik Helland of Johnston.
Senate conferees are Democratic Sens. Joe Bolkcom of Iowa City, Pam Jochum of Dubuque and Bob Dvorsky of Coralville, and Republican Sens. Brad Zaun of Urbandale and Steve Kettering of Lake View.
The bill would allow the full federal $500,000 Section 179 deduction retroactive to 2010; absent the legislation, Iowa's limit will be $134,000. The bills also enact "bonus" depreciation for Iowa; the House of Representatives ties Iowa's rules to the federal bonus depreciation rules starting in 2010; the Senate has a 2011 effective date.
This, of course, affects thousands of returns in process or already filed. It's long past time for Iowa to couple automatically with federal changes and legislate differences. This practice of having to update to the federal tax code every year is expensive and disruptive for taxpayers and preparers.
A tax CPA fails to set a shining example in Tax Court:
Petitioner has not demonstrated that there was reasonable cause for the underpayment and that he acted in good faith. Petitioner is a C.P.A. and holds a master's degree in accounting and taxation. Yet when asked by the examining agent to provide documentation to substantiate his claimed business expenses, he failed to do so. Petitioner asserted that this was not negligence; rather, "it's more or less when you're starting out doing something, like a medical doctor doing operations or maybe a lawyer representing somebody in the courtroom, you have a lot to learn. You do make mistakes here and there." We find petitioner's cavalier attitude unacceptable. This is not what a reasonable person would do, particularly a C.P.A.
Or, one hopes, "a medical doctor doing operations." Of course, it's rarer for doctors to operate on themselves than for CPAs to do their own returns.
Phase-outs of deductions are awful policy. They just put weird marginal rates at random income levels. While I don't favor this, if you must limit deductions for high-earners, Mr. Maule is correct that the way to do it is to convert the deduction into a credit.
When you are firmly convinced that the federal tax law doesn't apply to sovereign citizens of (your state) when enforced in a courtroom with a gold-fringed flag using standard punctuation, you rarely get good news from the courts. That may explain why the tax denier crowd got all excited when tax protest figure Joe Banister was acquitted of tax conspiracy charges in 2005.
Tax protesters crowed that the acquittal vindicated their theories. That's true only if you think that O.J. Simpson's acquittal means multiple homicides are legal in Brentwood. The Ninth Circuit Court of Appeals recently affirmed that tax laws still apply to Mr. Banister. The appeals court upheld a Tax Court decision requiring Mr. Banister to pay $4,551 in 2002 taxes, plus penalties.
Of course, no amount of evidence will shake the real tax protest true believers. Anybody with sense, though, will look at the unbroken record of failure of tax protesters in actually avoiding taxes in court and realize that the tax protest stuff just doesn't work.
Cite: Banister, CA-9, No. 09-70775.
Link: IRS publication "The Truth About Frivolous Tax Arguments."
The Des Moines Register reports that a new set of trial dates has been set for some of the remaining trials coming out of the Iowa film tax credit fiasco. Designated bureaucratic scapegoat Tom Wheeler goes on trial April 25. Other dates:
Dennis Brouse, filmmaker, August 22
Chad Witter, "film credit broker," September 26.
More on the charges here.
With the federal corporation return due date a week away and taxpayers clamoring for their K-1s, tax preparers still don't know what depreciation rules to use on 2010 Iowa returns. We'll be in the dark a little longer. On a party-line vote, the Iowa Senate refused to go along with the Iowa House tax code update bill yesterday.
The bills will now go to a conference committee to iron out differences. The House bill would make bonus depreciation available for 2010; the Senate bill only allows it starting in 2011. Both bills would couple with the federal $500,000 section 179 limit for 2010.
A lobbyist tells me that the different bonus depreciation dates aren't the hangup. The House bill has a less generous earned-income credit than the Senate bill, and that seems to be the problem. I just hope all of these legislators have big Iowa refunds that their failure to act will continue to delay.
Could it be?
It sure looks that way. It might not be pretty when the ethanol subsidies stop -- and someday they will.
I've heard it claimed that because this out-of-state company is benefitting from its franchisees' market in Iowa, it should pay a share of its profits to the state to pay for essential services like roads and courts and such. I have three reactions:
* Iowans are already benefitting from KFC Corp's brand, in that the Colonel's chicken dinner sales are voluntary transactions that make both parties better off.
* Iowa government spending is mostly for education, health care, police, parks, etc.: things that overwhelmingly benefit Iowa residents and the KFC franchisees, not KFC Corp and its employees. Residents should be willing to pay for the services they use and want rather than sticking out-of-state corporations with the bill.
* Should it really be the case that because someone in Iowa owes money to a Delaware company (which is essentially the relationship here), the Delaware company is subject to Iowa's income tax? Does that system have a logical stopping point aside from every state's corporate income tax being imposed on everyone?
We all benefit from stuff going on in every other state one way or another, even though we rarely notice it. Should we all pay taxes in other states on those "benefits?"
Related: Frying KFC
Our local IRS practitioner liason forwards some annoying news. It appears the IRS has erroneously processed 200,000 e-filed balance due returns too early. As a result taxpayers whose balance due will be withdrawn on the April 18 due date are receiving erroneous balance due notices. What do do?
If you receive a telephone call from a taxpayer stating they paid the balance due with the electronically filed tax return as an ACH debit, explain the balance due notice was erroneously issued. If the caller states they filed their return electronically and will pay the balance due by April 18 as an ACH debit, explain to the caller the notice shows the current balance due up to April 18, after April 18 penalties and interest could be assessed.
Every time something like this happens, it gets a little harder to have faith in the e-file system.
The Missouri Tax Guy tells what to do about it.
Professor Maule notes rising commodity prices, including a 25% increase this year in the staff of life, Cheese Whiz. He falls back into a neo-Malthusian funk:
it seems to me that it is caused by the confluence of three major trends: political unrest, weather and climate disruption, and excessive population growth. Government intervention with respect to any of these issues sparks deep controversy, aside from the question of whether government of the United States can do much of anything about them on its own.
I would argue that government intervention is a far bigger cause of the problem than the "three major trends." Around 30% of U.S. corn is being grown just to be burned as ethanol, with little or no savings of oil for the effort. That wouldn't happen absent subsidies provided in the form of tax credits. All 20th Century famines were man-made. Any early 21st Century famine would be too, brought to us by "green" energy policy.
I have likened the government's brutal penalties for trivial failures to report offshore bank accounts to "shooting jaywalkers." U.S. Citizens posted abroad for work or living abroad find penalties in the tens of thousands, or even hundreds of thousands of dollars, for failing to file the "FBAR" Form TD 90-22.1. The IRS is proposing these penalties even for taxpayers who attempted to come into compliance in the 2009 "amnesty" for FBAR penalties.
Now Andrew Mitchel reports that renunciation of U.S. citizenship is soaring:
The FBAR rules require U.S. citizens to file an FBAR report whenever they have a foreign bank account with a balance that rises over $10,000 in a year. Penalties can be up to half the account balance for each year the account is not reported. Americans who have move abroad after getting married, or who have taken overseas jobs, have found themselves in violation of a rule that many had never heard of. No wonder many Americans abroad have decided that it's just too risky and expensive to remain U.S. citizens.
The IRS is conducting another FBAR amnesty. We can only hope this one is better-run than the last one. Meanwhile, an organization called American Citizens Abroad is collecting FBAR horror stories in an attempt to change government policy towards minor FBAR violators.
Update, 3/10/2011: The TaxProf has more.
Pulitzer Prize-winning tax beat reporter David Cay Johnston thinks that those who think that the government is spending too much have it wrong. The problem is that we aren't paying enough taxes:
There is a simple, factual way to describe what is happening to our government: We have a revenue problem.
Maybe not. Yes, revenues have plunged in the recession -- as you would expect from a system where taxes are collected overwhelmingly from corporations and a narrow base of high-income individuals -- the ones with the most volatile taxable incomes. But this chart (charts courtesy Reason.com) shows that a revenue drop has been, oddly, accompanied by a spending binge:
It's as if, when one member of a two-earner couple loses a job, the couple responds by taking a cruise.
The idea that the federal budget would be fine if we would just do a better job of collecting taxes looks even worse if you look ahead a few years:
The projected spending on medicare and social security will swamp any attempt to solve the problems by tax increases alone. But Mr. Johnston seems to think we have no choice:
Mitchell's tax ideas are great if you want a government with no money to track al-Qaida's money or under which our food-borne illness rate (now 21 times that of France) would make death by salmonella rank with cancer and heart disease in the mortality statistics. In Mitchell's ideal America, we would not have a cent for scientific research, a foundation of wealth creation in the future, as the governments of China, India, Korea, and most of the rest of the civilized world understand.
Actually, around 60 percent of federal spending consists of payments to individuals -- taxing some of us to write checks to everyone else. That doesn't kill many salmonella bugs. Even if you think federal efforts are all that keeps food companies from killing all of their customers, there's a lot of room to cut spending before you fire the food inspectors. Ethanol subsidies and farm payments alone amount to $20 - $40 billion in annual transfers to mostly-prosperous folks.
When a couple comes in for credit counseling, of course they need to think of ways to raise new revenue -- but they're doomed if they don't control their spending. The government is no different.
UPDATE, 6/26/2011: Links to Junior Deputy Accountant's posts mentioned in the comments:
The three-year period for claiming refunds for 2007 by filing an original 2007 return expires April 18. The IRS is sitting on a lot of unclaimed withholding that it will get to keep if people don't get on the stick in the next few weeks and get their 2007 1040s filed. Kay Bell and the Smartmoney Tax Blog have more.
The Obama administration has focused its tax reform talk so far almost exclusively on corporation tax reform - to the extent that the Treasury Secretary has even floated the idea of eliminating pass-through business taxation. Pass-throughs, like S corporations and partnerships, do not pay tax; they instead "pass through" their taxable income to their owners, who report the income on their own returns.
The elimination of pass-throughs is almost certainly stillborn. Corporation tax reform -- a lower rate with fewer deductions and credits -- is much more possible. TaxVox has a good Howard Gleckman post about some of the problems it would pose:
Corporations would lose the benefit of some tax breaks but in return may pay at a top rate of as low as 25 percent (Obama has yet to propose a plan so I am guessing here). Non-corporate businesses would lose those same deductions and credits, but get no benefit from the corporate rate cut. In fact, Obama would have very successful pass-throughs, whose owners pay the top individual tax rate, pay even more.
He’d raise the statutory rate to 39.6 percent and restore the phase-outs of itemized deductions and personal exemptions (worth about another 2 percentage points). Thus, he’d cut the top corporate rate to, say, 25 percent, while raising the top rate for non-corporate businesses to 42 percent. If Congress wanted to use some tax revenues to help reduce the deficit, it could raise those individual rates even more.
To make things more complicated, Obama would also raise the capital gains rate to 20 percent (with another add-on in the law to help pay for health reform). This would further disadvantage double-taxed corporations.
The individual rates would actually be worse in many cases. The "unearned income" surcharge in the Obamacare health care reforms would add another 3.8 percent to the tax rates for "passive" pass-through owners and to capital gains. The top rate for business income taxed on personal returns would be nearly 46%, compared to a (perhaps) 25 percent corporation rate. TaxVox accurately notes that many business owners would have to rethink their tax structures:
For real people, a decision that was once a no-brainer would suddenly become awfully complex. Do I organize as a corporation and pay a relatively low corporate rate but a rising rate on gains and dividends, or do I organize as a pass-through and pay a much higher individual rate but no second-level tax?
A better answer will be to do base-broadening and rate-cutting for both corporations and individuals. The basic ideas aren't hard -- eliminate deductions and credits, and lower rates. The politics are what's hard.
A little Louisiana Hot Sauce can make your scrambled eggs great, but the whole bottle probably ruins them. Using S corporations to reduce employment taxes works something like Louisiana sauce -- you can overdo it.
That's the lesson we learn from a Louisiana law firm's Tax Court case this week. The Donald G Cave law firm was an S corporation. It filed returns on the basis of having full-time attorney employees, as Tax Court Judge Marvel explains:
Donald Cave considered petitioner an "attorney incubator" because he generally hired recent law school graduates with little prior professional experience.
Donald Cave believed it was appropriate for petitioner to treat the associate attorneys and Mr. Matthews as independent contractors because he did not have sufficient control over their work. The record does not disclose, however, the basis on which Donald Cave determined it was appropriate for petitioner to treat the associate attorneys, Mr. Matthews, and himself as independent contractors.
The Tax Court opinion goes through each person that the IRS wanted to treat as an employee, starting with Mr. Cave, the owner:
An officer of a corporation who performs substantial services for the corporation and receives remuneration for such services is an employee for employment tax purposes...
In 2003 and 2004 Donald Cave was petitioner's president, made virtually all corporate decisions with respect to petitioner, received a percentage of the legal fees recovered in cases he handled, and received draws from petitioner of $48,000 and $360,000 in 2003 and 2004, respectively. These facts tend to establish that Donald Cave was petitioner's employee within the meaning of section 3121(d)(1).
The case doesn't indicate whether any earnings passed through on Mr. Cave's K-1; to the extend they did, he was able to avoid Medicare taxes on that amount.
The judge also decided the associate attorneys were under sufficient control by Mr. Cave that they should be treated as employees.
The Moral? S corporations can reduce professional employment taxes under current law, but don't overdo it. If you pay yourself no salary, or a token one, you are looking for trouble with the IRS.
State tax breaks for seniors are under fire in states coping with budget problems, reports Janet Novack.
Iowa has several such breaks, including its exclusions for social security and pension income. Seniors are quick to say they deserve them because they are on "fixed incomes." While that may be true, demographically seniors have a higher net worth than the rest of the population. They often live in a paid-for house, and they seldom have child-care expenses. And really, who among us have a "flexible" income that we can just ramp up as needed?
That's not to say needy seniors shouldn't get a break; it's just that not all seniors are needy, and being a senior is a poor proxy for being needy.
Already serving time for tax charges, Wesley Snipes has appealed to the U.S. Supreme Court, reports the TaxProf. The chances of the court choosing his case are just ahead of the chances of Justice Ginsberg going on Dancing With the Stars next season.
The IRS yesterday issued (Rev. Proc. 2011-21) the maximum vehicle depreciation limits under the so-called "luxury auto" rules of Section 280F. The guidance pointedly leaves open the treatment of vehicles eligible for 100% bonus depreciation in years 2-6 of their depreciation life:
The Service intends to issue additional guidance addressing the interaction between the 100 percent additional first year depreciation deduction and § 280F(a) for the taxable years subsequent to the first taxable year.
The IRS may decide that the year 2-6 limits for such vehicles will be...zero.
For autos qualifying for bonus depreciation placed in service in 2011, the limits are:
Year 1............. $11,060
Year 2............. $4,900
Year 4 and beyond: $1,775
For vehicles not subject to bonus depreciation, the limits are:
Year 1.............. $3,060
Year 2............. $4,900
Year 4 and beyond: $1,775
For light trucks and vans, the limits are:
Year 1............ $11,260 ($3,260 without bonus)
Year 2............. $5,200
Year 4 and beyond: $1,875
But vans and light trucks may also be subject to a year 2-6 "zero" limit.
The Iowa House of Representatives last night voted to allow bonus depreciation and $500,000 of Section 179 depreciation on Iowa tax returns effective for 2010.
The Senate-passed version of S. 209 increases the Iowa Section 179 limit to $500,000 effective for 2010, but only allows bonus depreciation starting in 2011. It's not clear which bonus depreciation effective date will emerge when the two houses reconcile their versions of the bill.
This is a quandary for businesses wanting to get their 2010 returns filed. As I wrote at IowaBiz.com yesterday, it may be wise to wait a little longer before filing Iowa returns when you have bonus depreciation or over $134,000 in Section 179 deductions on your federal filings.
Many taxpayers have already filed for 2010. The House-Senate conference should add a provision to S. 209 to allow any taxpayers who have already filed under the old rules to continue to depreciate their 2010 assets that way so they don't have to amend their already-filed 2010 returns.
It's getting cold again here in the upper Midwest, but we know spring is coming. So let's have a carnival -- the Carnival of Taxes!
Kay Bell is hosting this edition of the best roundup of tax blog posts anywere on the Internet. Don't miss out!
The IRS has been brutal in its treatment of taxpayers who have tried to correct seemingly minor paperwork omissions in reporting offshore financial accounts. I've likened these severe penalties for trivial violations to "shooting jaywalkers."
Now an organization called American Citizens Abroad is collecting stories of these abuses in an effort to change things. Phil Hodgen has the details.
Anybody who has been around a divorce knows it can get pretty ugly, and the bad feelings can last a long time. A dispute simmering between a man and his ex mother-in-law since 2006 has just been decided on appeal by the U.S. Seventh Circuit.
The case arose before the breakup when a wife's mother loaned the struggling couple a credit card, on which they rang up $30,000 of charges they couldn't repay. After the breakup, the mother-in-law, after being unable to collect, forgave the debt and issued a 1099-C to report the debt cancellation to the IRS.
Son-in-law sued, saying that because M-I-L wasn't a financial institution, she wasn't required to issue a 1099-C (true), and that the 1099-C was therefore per-se fraudulent. A district court sided with M-I-L in 2009. Even though IRS said S-I-L didn't have to pay tax on the debt forgiveness, he persisted, appealing to the Seventh Circuit, who yesterday upheld the ruling.
The moral? You can issue a 1099-C, even if you don't have to, if the information is correct. And sometimes you just need to just let it go and move on.
The Tax Policy Blog has issued this map of "Property Taxes By County, 2005-2009 Average"
I see my county in the middle of Iowa is a lovely deep blue. I'd prefer pale, thank you. Lots more property tax fun at the Tax Foundation's interactive property tax database.
Strictly speaking, you can't depreciate dirt. Farmland can be more than just dirt, though. Along with the dirt you are probably buying fencing, drainage tile, and maybe even already-applied fertilzer. As Roger McEowen explains, these may all be depreciable to a buyer.
Remember, though, that any purchase price allocated to depreciable items by the buyer may trigger ordinary income to the seller -- and a 35% federal tax instead of a 15% rate. The IRS gets unhappy in a hurry if the buyer and the seller don't report this consistently.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to