Do you know where your TD F 90.22-1, Report of Foreign Bank and Financial Accounts, is? If you have a foreign bank account that went over $10,000 in 2010, the form is due today, and the IRS fines can reach half the account balance, or $10,000 if greater, if you don't file.
The Tax Update hasn't been a sitcom viewer since before "Cheers" came on the air, but even I know who Cliff Clavan is. The actor who played Cliff Clavan, John Ratzenberger, played an offstage role in Tax Court yesterday.
The starring taxpayer, a Mr. Alioto, apparently had a business falling out with Mr. Ratzenberger. He claimed over $100,000 in losses as a result of the venture. He told the Tax Court that the losses were deductible as theft losses, with Mr. Ratzenberger as the alleged thief. The Tax Court was unconvinced:
Massachusetts law thus requires Mr. Alioto to show proof that Mr. Ratzenberger committed acts of larceny or fraud specifically intended to steal from Mr. Alioto or to defraud him by false pretenses when BRT was established in 2000 and 2001. There is nothing in the record that would prove that Mr. Ratzenberger committed any wrongdoing. Mr. Alioto did not present any evidence demonstrating that Mr. Ratzenberger or his agents did anything illegal and failed to show any specific promises or agreements made by Mr. Ratzenberger and his agents. Mr. Alioto never contacted the police, the Securities and Exchange Commission, or any State licensing division, never filed suit against Mr. Ratzenberger, and never had any written contract between himself and Mr. Ratzenberger.
Surely, though, there must be some documentation?
At trial Mr. Alioto claimed that a formal agreement did exist between himself and Mr. Ratzenberger but that he had left it at home and did not want to share it with anyone.
That's puzzling. Usually you enter formal agreements specifically so you can document your rights under the deal in court.
The bottom line? No deduction for Mr. Alioto -- but no penalties:
Mr. Alioto is not a tax expert, nor has he any background in tax law. Respondent does not dispute that Mr. Alioto incurred $103,150 of expenses. Neither does respondent dispute that Mr. Alioto was involved in a complicated business transaction. Mr. Alioto sincerely believed he was shorted $103,150 in this business transaction, and he genuinely believed he was entitled to some income tax relief.
The Moral? Documenting your losses is critical, whether your losses are attributable to Cliff Clavan or Diane Chambers.
Cite: Alioto, T.C. Memo. 2011-151.
This unusual bill is a result of the legislature passing a major tax bill near the end of this year's tax season. SF 512 conformed 2010 Iowa rules to federal rules for these three items after most 2010 Iowa returns had been filed. SF 512 increased the Iowa Section 179 deduction to $500,000, from $134,000, for 2010. It also allowed Iowans to claim the $250 educator expense deduction and the federal tuition deduction for 2010.
The bill allows Iowans to get the benefit of these belated 2010 tax breaks without having to amend returns. This will save people from the absurdity of amending a return to get a $20 refund for teacher expenses. It will also save pass-through entities the need to have all of their owners amend returns to claim the extra Sec. 179 deduction, with the resulting hassle and expense. Taxpayers can still amend 2010 returns if they prefer to.
The Senate also passed the expansion of the earned income tax credit yesterday (SF 533). The Iowa credit rate rises to 10% for 2011.
The initial version of this post erroneously reported that the amended return relief was not in the bill. I apologize for the error.
Is tax geekery suited for video? Andrew Mitchel, proprietor of the International Tax Blog, means to find out. He has posted a YouTube video on failed tax-free incorporations. Check it out for yourself.
Rest assured, the Tax Update will never sell out, unless I get a good offer.
It's going to be toasty out there today, so find a cool spot in the new Cavalcade of Risk!
Hosted this week at Worker's Comp Insider, the blog world's roundup of insurance and risk management includes, among many other things, Insureblog's discussion of the insurance perils of "peer-to-peer car sharing services."
A gentle reminder from the IRS and your Department of Justice:
Dr. Arvind Ahuja of Greendale, Wis., was indicted today by a federal grand jury in Milwaukee on four counts of willfully filing materially false tax returns and four counts of failing to file Reports of Foreign Bank and Financial Accounts (FBARs), the Department of Justice and Internal Revenue Service (IRS) announced.
According to the indictment, Dr. Ahuja, a board-certified neurosurgeon, wire transferred and maintained millions of dollars in bank accounts in India and the Bailiwick of Jersey at The Hongkong and Shanghai Banking Corporation Ltd. (HSBC). In 2009, the HSBC bank account in India had a balance of $8,733,785. The indictment alleges that Dr. Ahuja failed to report these bank accounts to the IRS on his 2006-2009 tax returns.
The defendant's attorney blames the banks for failing to issue 1099s, and says that he is confident of acquittal.
Jack Townsend has more.
Remember, Form TD F 90.22-1, the report of foreign financial accounts, is due tomorrow. If you haven't filed yours yet, take the time to get a certified mail postmark, because the IRS has an inexusable practice of assessing late penalties when the forms are received late, even when mailed on time.
Just in time for the summer film season! Lee Rood reports:
The Iowa attorney general's office charged Harel Goldstein with first-degree fraud, conspiracy and forgery, alleging he made false statements to try to obtain Iowa tax credits he was not entitled to, according to court documents.
Goldstein sought the credits for a horror film made in Iowa called "Underground." State officials denied him credits after an audit revealed his alleged false claims.
The story says that Mr. Goldstein was sentenced last year to four years in federal prison on other fraud charges. These are the kinds of entrepreneurs you can expect to attract by throwing taxpayer money around.
Tom Wheeler, former Director of the Film Office and designated official scapegoat, is scheduled to go on trail on felony misconduct charges August 15.
The executor files an estate tax return valuing a 15% interest in an LLC at $34,936,000.
The IRS audits the estate tax return. They value the interest at $49,500,000, assiessing a deficiency of $6,990,720.
The Tax Court yesterday rules the correct value is $32,601,640. At the 48% estate tax rate that applies for 2004, that gives the estate a refund of $861,422.
It's a good thing they audited that return, because that will help Commissioner Shulman pay to regulate more preparers.
The tax law is so complicated that errors and manipulation are rife. So what does a guy largely responisble for creating the problem do? Blame the preparers, of course. From Tennessee Tax Guy:
Yesterday, Senate Finance Chairman Max Baucus (D-Mont.) added several last minute changes, including the imposition of higher penalties on paid tax preparers, to a package of free trade agreements with foreign countries such as Korea, Panama and Colombia and a Trade Adjustment Assistance (TAA) program designed to provide relief to workers who have lost their jobs due to foreign trade.
We'd get much further with severe penalties for negligent and fruadulent tax legislation. Here are some ideas:
- For any effort to "solve" a problem with a new tax credit or deduction: a choice between two hours in the stocks in every county seat in the congresscritter's home state, or riding a bike naked across Iowa in January.
- For every bill drafted with the fraudulent title of "temporary" to game the budget scorekeeping process, like the dozens of "extenders" passed every year or two, a choice between public flogging or resigning from office and permanent exile to a monastary, subject to an eternal vow of silence.
But this might be way too lenient.
Kay Bell tells the infuriating story of how a Florida congresscritter is hell-bent on blowing billions of taxpayer dollars on a Florida "high speed" route to serve an estimated 2,150 commuters.
Something similar is going on in Iowa, where critter Bruce Braley, the supergenius behind "Cash for Clunkers," is pressing Iowa to throw $20 million into a $300 million project to build a "high speed" link between Chicago and Iowa City. In this case "high speed" means "slower than the bus, but more expensive."
And they tell us that the only way out of our problems is to give these people more of our money to spend.
You never know who's flying in the Cloud, says intellectual property attorney Brett Trout:
The FBI has demonstrated in recent weeks that it does not separate the bad guys from the good guys when it comes to confiscating online data. If your data just happens to be stored on the same server as information sought by the FBI, or even if it isn’t, the FBI may seize your data, and go through it with a fine tooth comb. Any decision to store sensitive documents online should not only take into account the likelihood of attacks by hackers, but by the government as well.
I love the convenience the Cloud; it's nice to type something on Google Documents and be able to open it anywhere. Still, the Cloud may not be the place to keep things that you really need to keep to yourself.
The filing deadline for form TD F 90.22-1, is Thursday. The IRS has a nasty (and inexcusable) habit of assessing penalties when they fail to receive the filings by June 30, so mail it today if you haven't already done so.
An Oregon lawyer, a Mr. Ramig, got a safety-boot kick in the shins in Tax Court yesterday. The lawyer provided cash to ShoeS4Work, a corporation selling steel-toed shoes, and took a bad debt deduction when the funds weren't repaid. The IRS said that the "purported loans" were actually equity, and the deduction would presumably only be available when the Shoes4Work stock was sold or became worthless.
The Tax Court said that the IRS had the better case (citations omitted):
Equity participants take a subordinate position to creditors regarding payment on liquidation: they get paid last. So taking a subordinate position to other creditors (the sixth factor) may suggest that the purported lender is really an equity investor. The notes say neither that they are senior nor that they are junior to other obligations. But Ramig did not demand timely repayment and thus treated his claim as subordinate to the rights of the creditors that were paid first.
The IRS also assessed penalties for lack of a reasonable cause for the disallowed deductions.
The Moral: If you want to have a loan, you have to act like an aggrieved creditor when the "loan" goes bad.
The Tax Policy Blog says Maryland, Connecticut and Colorado had the highest percentage of 1040s claiming the home mortgage interest deduction in 2009. Iowa is #34. They illustrate their post with this nice map:
If you leave a trail of enemies, it can get awkward if you get in trouble:
Kenneth Heller, 81, was charged for evading personal income taxes and pleaded guilty to three counts in a Manhattan courtroom. He will face a maximum of 15 years in prison but could have his sentence reduced due to health concerns, according to Bloomberg.
“I did not pay the United States a substantial amount of taxes for the calendar years charged in the indictment,” Heller, reading from a statement, told the judge.
According to the New York Post, Heller was known for his cranky temperament as a lawyer. He earned the nickname "Kenny Yeller" and was eventually disbarred for his abrasive attitude toward opposing attorneys as well as judges, the Post states.
He probably hopes that he didn't yell at the sentencing judge sometime in his career. Jack Townsend has more.
If the folks in this article are to be believed, the clients of late-night tax relief ad attorney Roni Deutch might be lucky to get back pennies of the up front fees they paid to her firm to get their tax debts settled. And they still owe their taxes.
The Tax Court upheld "defined value" donation case, where a charitable gift or bequest of stock is stated as a specific dollar value of stock. That way if the IRS challenges the appraisal and reduces the charitable deduction, the charity will just get more shares to restore the deduction, and, in theory, the IRS gets nothing for its effort.
And not just in theory, as a Tax Court case last week shows. Roger McEowen covers the new case and state of this "Charitable Lid" planning technique.
So says this post, which says that New York has a much larger surplus of legal talent -- 7687 excess attorneys. Where are there too few attorneys? Nebraska is 3 short, Wisconsin 14 (probably something to do with their Supreme Court), and D.C. is short 345.
Via the TaxProf
Villanova tax professor Jim Maule may not be the one to sort out your relationship issues for you, but he can help you with the resulting taxes. He ponders the tax lives of those who are paid to go out on dates:
According to the Philadelphia Inquirer article, someone set up a website called WhatsYourPrice. Notice that I’m not providing the link, and those who are sufficiently curious can find their way there on their own. I haven’t visited the site, so I’m relying on the reporter who wrote the article. What makes this web site different is that “so-called generous members (most men) open their wallets and bid real money for a first date with members who list themselves in the ‘attractive’ category (mostly women).” The web site makes its money by charging members for the right “unlock e-mail conversations with attractive members.” Winning bidders pay a separate amount to the person with whom they sought a date. The article explores the psychology and social implications of the arrangement, including charges that the web site is nothing more than a fancy escort service. Members claim that’s not the case. No matter, what I found most interesting is the tax angle.
The tax angle is the most interesting thing? If I had a daughter and needed somebody to chaperone a cross-country trip for her, I think Jim Maule might be my man. And the tax consequences?
What are the tax consequences of being paid to go on a date? One woman interviewed for the story explained that she received $120 in a card handed to her by the member who successfully bid for a few hours of her time, which she says was spent at dinner at a fine restaurant. Is the $120 gross income? How can it not be? It’s not a gift.
But he suspects that tax compliance here might not be all that great...
UPDATE, 6/28/11: Prof. Maule chimes in below in the comments, and Dan Meyer says that you can spice up not just sex, but also violence with a saucy tax reference.
This article says the Iowa General Assembly may finally end their ridiculously long 2011 session this week. Whether they will allow taxpayers to claim the 2010 tax benefits they enacted at the end of the filing season on 2011 returns -- rather than having to amend 2010 -- remains up in the air.
Micaela and Tony Dutson were convicted of running an illegal tax scheme for a decade. They may have drawn unwanted attention to themselves by slapping a lein on then-Treasury Secretary Snow for $108 million. They ended up with a 10-year prison sentence.
The nice judge gives them some time to get their affairs in order before going to prison. That may have been a mistake:
Last March, U.S. District Judge Anna J. Brown sentenced the Dutsons to 10 years in prison each for crimes she described as "the epitome of disrespect of the law." Brown allowed the couple to live at a relative's house in the eastern Oregon town of Elgin before surrendering to prison authorities on May 23. But they were no-shows.
The government accuses them of cutting off their electronic monitoring bracelets, absconding from supervision and fleeing to the Phoenix area. U.S. marshals hunted them down and arrested them there on June 10.
That may be good for another ten years each for the couple, aged 48 and 53. That will make it hard to collect that $108 million tax lein.
Paul Neiffer explains why the ethanol industry can get by if the subsidies go away:
Also, the ethanol industry is more mature than when the tax credit subsidy was originally placed into service and ethanol now actually costs about 30 cents cheaper than gas. This difference would be reduce by eliminating the 45 cent per gallon credit, but it would not have a dramatic effect on the industry.
This is especially true due to the mandate to blend 12.6 billion gallons of ethanol into gasoline this year. As long as that mandate remains, ethanol should remain a vibrant industry and the Obama industry stands behind it so far.
It's a sweet deal, unless you are a livestock producer squeezed by high corn prices or somebody in a poor country who is going hungry while the law requires us to burn food.
Peter Pappas: Ohio Toll Collector Paid $103,150 in 2010.
You have to hope that the clients of a New York accountant have better tax records than he does, based on a Tax Court case yesterday. The Accountant claimed $473,540 in expenses over three years to offset $514,636 in reported income from accounting and photography. After the accountant filed his tax returns late, the IRS disallowed all of the claimed expenses for lack of documentation or lack of connection to the business.
The Tax Court takes up the story:
Petitioner paid his children what petitioner refers to as "per diem", allegedly in connection with services they performed in petitioner's accounting activity. These per diem payments, however, appear to have been set at amounts that would allow the children to benefit from the earned income tax credit, not at amounts that reflect the value of any services the children actually performed for petitioner, and the credible evidence does not establish the nature and extent of any services the children performed for petitioner.
So if the cobbler's children are barefoot, the government isn't supposed to buy them shoes? Maybe they didn't actually work, but they appear to have at least been available for duty:
During the years in issue petitioner lived in his father's house with between 10 to 18 other family members and individuals.
And they were stuck there:
Other than petitioner, none of the persons living in this house owned a car.
But that caused problems with the deductions for business use of the car:
The car petitioner owned and used in his accounting and photographic activities was also used by petitioner and by other persons living with petitioner for their personal use.
You have to wonder what the accountant was hoping to accomplish in Tax Court, considering the evidence he presented. From the Tax Court opinion:
At trial petitioner did not credibly explain how he accounted for the income received and the expenses incurred in his accounting and photographic activities. Petitioner stated he gave funds received to his wife and she did whatever she wanted with them.
I'm pretty sure my accounting firm doesn't do that.
As noted above, documentation petitioner offered to substantiate claimed expenses relating to his accounting and photographic activities is illegible, some of it is blank, and much of it is not in petitioner's name, but rather in the names of petitioner's wife and children.
We don't do that, either.
There is no credible evidence that petitioners' children worked in any meaningful way for petitioner in either his accounting or his photographic activities that would have justified the per diem payments petitioner paid to them.
In support of claimed depreciation, petitioner offers a list of assets for 2006. This list is insufficient to establish that petitioner purchased and placed into service the depreciable assets and that the depreciation amounts petitioner claimed during the years in issue were correct
Why so little evidence? The dog ate it! OK, maybe there was no dog. Would you believe a fire?
Petitioner claims that some of the documentation relating to his accounting and photographic activities was destroyed in a fire or lost as a result of a computer crash. Petitioner submitted numerous general receipts at trial but has provided no credible evidence that the purpose for those expenses related to petitioner's accounting and photographic activities, and petitioner's ability to produce numerous receipts calls into question petitioner's allegation that a fire or a computer crash occurred that destroyed his records.
The trip to Tax Court didn't go well. The IRS won across the board, including late-filing and accuracy-related penalties.
The Moral? You really need to keep records for your business. Even if you are an accountant.
UPDATE, 6/28/2011: An alert reader notes that the taxpayer was suspended from practice before the IRS indefinitely from October 17, 2008 for failing to file his returns.
Cite: Fein, T.C. Memo 2011-142
Remember when an IRS assistant branch chief said that the business mileage rate wouldn't change mid-year?
Changing the rate in the middle of the year could present logistical challenges, and if the price of gas dropped, there would be more complications, she said. "If it increased now and gas prices drop significantly, you're going to end up overpaying with regard to expenses incurred," she said.
Well, never mind:
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
Because IRS Commissioner Doug Shulman is all about fairness.
The updated rates:
David Logan puts it starkly:
Simply put, the federal estate tax does nobody any good.
Estate taxes are generally levied for two reasons: To break up concentrations of dynastic wealth and to raise significant tax revenues. The seminal 1987 NBER paper by B. Douglas Bernheim, Does the Estate Tax Raise Revenue?, suggests that the estate tax accomplishes neither of these goals.
In fact, according to Mr. Logan, the net effect of the estate tax may be to reduce revenue.
Anybody working in the financial world quickly realizes there is a much more powerful force to break up dynastic wealth than the estate tax. They're called "beneficiaries."
To the extent the estate tax does any good, it's does so through the basis-step up at death -- solving the need to dig through ancient or lost records to determine tax basis. Still, that goal could be accomplished by other means at much lower marginal rates.
How is revenue from "cloud computing" taxed by the states? If you sell "software as a service," where do you have to pay taxes? Brian Strahle says:
Most states still don't know how they are going to tax cloud computing. But one thing is certain, they are going to definitely try.
He has 12 questions to ask if you are trying to figure out your state tax exposure in the cloud.
There is a push for the IRS to provide "free" tax software. Consider tax attorney Peter Pappas unimpressed:
This is a bad idea for several reasons:
-The IRS has a poor track record of developing software;
-The development of the software will cost taxpayers $20 to 30 million which means the service isn’t really free; and
-The IRS has a conflict of interest: It’s primary mission is to raise revenue for the federal government. But if it gets into the tax preparation business it should also be committed to legally minimizing the taxpayers’ tax liabilities. The objectives are incompatible.
You don't trust the IRS to help you achieve the lowest legal tax liability?
Len Burman is just full of good cheer at TaxVox as he evaluates the latest edition of the CBO's "The Long-Term Budget Outlook":
Translation: big tax increases or spending cuts right now would be a bad idea given the fragile state of the economy, but committing to serious debt reduction that will take effect once the economy has recovered is urgent if we are to avoid a budget catastrophe.
If you find anybody in charge acting "serious" or doing anything "urgent," let me know.
Tax Court opinions don't have to be boring, even if they are about boring procedural issues. Take this opinion overturning an IRS levy action yesterday:
In the summer of 1997 an IRS agent visited the office of a down-on-his-luck Chicago lawyer named Mark Rosenbloom. Rosenbloom knew he owed back taxes -- he had signed installment agreements with the IRS in 1988 and 1993. But his severe personal problems had caused him to delay sending in updated financial information and to miss a couple months' payments. The agent squeezed hard, threatening to shut down Rosenbloom's office and put him out of business unless he consented to waive the statute of limitations until 2009 for overdue taxes dating back to 1981. A month later, the agent returned to try to seize Rosenbloom's office furniture, and a few weeks after that tried to seal the elevator to Rosenbloom's office.
I think of Humphrey Bogard as Sam Spade here. Or maybe Dick Van Dyke:
Segal described Rosenbloom's history of alcoholism, his recent breakdown and entry into an eight-week outpatient program, and even his trichotillomania (a compulsive disorder whose victims pull out their hair). Segal appealed to the Commissioner's reason: Rosenbloom had already more than made up the missed payments, as well as tendered a check for more than the forced-sale value of the office furniture. Rosenbloom was trying to recover from alcoholism, Segal wrote, and trying simultaneously to settle several malpractice suits. If the Commissioner "closed him down," the debt would likely become completely uncollectible. The IRS Problem Resolution Office intervened and stopped the seizure.
Trichotillomania is actually a seasonal disorder. Tax Season.
In any case, Judge Holmes found that the IRS was out of line in its levy efforts.
From Peter Reilly, an IRS ruling denying exempt status for a dog training school:
While the owner receives some instruction in how to give commands to his dog, it is the dog that is the primary object of the training. The dog is also the primary object of the subsequent training in sporting and show events. Therefore, the organization's training program for dogs is not within the meaning of educational as defined in the regulations.
Hmm. 501(c)(3) just refers to "educational" organizations. It doesn't say anything about what is educated. Maybe that's why the ruling has a backstop argument that the dog owners derive a benefit, violating the rule rule that there be no private benefit for an exempt organization.
The IRS has issued (Rev. Rul. 2011-14) the minimum required interest rates for loans made in July 2011:
-Short Term (demand loans and loans with terms of up to 3 years): 0.37%
-Mid-Term (loans from 3-9 years): 2.00%
-Long-Term (over 9 years): 3.86%
The Long-term tax-exempt rate for Section 382 ownership changes in July 2011 is 4.3%.
Con jobs, and jobs for prosecutors. From Tampa Bay Online:
Two former certified public accountants were found guilty Tuesday of conspiracy to defraud, conspiracy to commit wire fraud and illegal monetary transactions, according to the U.S. Attorney's Office.
Authorities allege the two men purported to obtain the methane rights for landfills in Puerto Rico, Illinois, New York, Ohio and Connecticut, and created bogus engineering reports stating that the landfills qualified for methane tax credits. But in most instances, the landfills had no methane production facilities or the facilities were not operational.
Federal law allows an income tax credit for sales of fuel from nonconventional sources, including some methane produced by rotting trash in landfills, according to the U.S. Department of Justice. To claim the credit, a taxpayer must produce and sell the fuel.
Not to mention those good jobs for federal prison employees.
"No Pay for California Legislators Due to Late Budget, Controller Rules" (Via Tax Policy Blog).
They're still overpaid.
Many Indian citizens work for the insurance industry in Des Moines. It's a fair bet that some of them have inadvertently set themselves up for big potential fines from the IRS for failing to file form TD F 90.22-1, the "FBAR" form, to disclose their bank accounts back home.
The deadline for filing the forms for 2010 is June 30. TaxGrrrl explains how to file in her Forbes blog. She also discusses the "Offshore Voluntary Compliance Program" available for taxpayers who have missed filings for old years.
TaxDood has spells out the stakes:
The penalty for willfully failing to file the FBAR for a given tax year can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation. Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. These possible penalties are separate and in addition to penalties that may be imposed for failing to report any taxable income associated with the account (e.g., failure to file, failure to pay, 20% accuracy-related penalty, etc.).
So meeting the deadline is important. If you think you might need to file, get on it.
Yes, the IRS can be political. Kip Dellinger, former chair of the American Institute of Certified Public Accountants Tax Division's Practice Responsibilities Committee, ponders the sudden IRS interest in assessing gift tax on contributions to 501(c)(4) political outfits in an excellent (but unfortunately gated) Tax Notes article ($link). He notes that history gives us grounds for suspicion:
Presidents Franklin D. Roosevelt and Nixon were particularly notorious for using the IRS to persecute their political enemies. It is widely acknowledged that Roosevelt used the IRS to fight Sen. Huey Long and Andrew Mellon, Treasury secretary during the Hoover administration. Roosevelt also blocked an examination of then-Rep. Lyndon B. Johnson.
Tax administration has a strange way of adopting the prevailing political orthodoxy.
And he explains why Commissioner Shulman's bland assurance that the
witch hunt examination program for 501(c)(4) outfits was initiated by career IRS employees, rather than political appointees, misses the point:
There will be no smoking gun implicating the White House or its surrogates in targeting specific donors. However, Shulman ignores the reality of how IRS career employees -- with all their biases -- operate, and how they may take liberties when their political party controls the White House.
He notes that many of these dedicated civil servants are members of the highly-political National Treasury Employees Union, and concludes that a Treasury Inspector General for Tax Administration investigation is called for. The Dellinger article has a good summary of the history of attempts to tax political contributions, and I hope Tax Analysts ungates it.
From Arden Dale at WSJ.com, "Tips for Solving the Cost Basis Mystery," with useful tips for tracking down the basis of long-held or gifted shares.
Left-side tax attorney-blogger Linda Beale starts her argument for a "discrimination tax" with a bold statement:
The Supreme Court handed down its decision on whether the million and a half women who think they have been discriminated against by the corporate giant because of their gender can bring a class action suit.
With powers like that, Ms. Beale is a force to be reckoned with. It's hard enough to know what one person thinks. Knowing what's in 1.5 million minds is pretty awesome. Talent like that is wasted on the tax law.
More from The TaxProf.
If you want to follow the Roni Deutch case, I strongly urge you to read the coverage in the Sacramento Bee. For example, on Sunday they spoke with several unhappy clients of Ms. Deutch. For the most part it appears that these individuals received initial consultations and then…nothing.
That's the rap against the TV tax settlement outfits in general. The Deutch trial will put that rap to the test.
Mr. Fox also has some wise words about attempting to settle tax debts:
As for the firms that still advertise and promise you that they’ll stop the IRS, and you will qualify to pay "pennies on the dollar," remember that:
- Only about 15% of Offers in Compromise successfully make it through the IRS;
- It typically takes over one year for an OIC to make it through the IRS;
- Most individuals will not qualify for an OIC; and
- If you look at the fine print of the commercials, you will see, "Case not typical. Your results may vary."
The IRS is unlikely to settle for "pennies on the dollar" unless you are what is known in the trade as a "turnip," so truly broke that it's not worth the IRS's time to keep after you. Winning that sort of settlement means you are still broke -- not exactly a glorious victory.
Via the TaxProf, "Dilbert: Let's Tax Stupidity So We Have Less Of It"
A few years ago a Twin Cities-area strip club owner went on hiatus for skimming strip club receipts using the club's ATM. The owner used cash from club receipts to refill the ATM. Then the cash from the special bank account that was supposed to fill the ATM was diverted instead to the club owner for personal expenses.
At the time, we thought the ATM scheme might have been the result of the creativity of a bored strip club owner. A new case now makes me wonder if it was a break-out session topic at a club owner convention. From a Virginia federal court order last week:
In late July 2005, Moore installed three ATM machines in the club that were tied to Moore's LA Diner bank account at Bank of America. After a search warrant was executed at Club Velvet in February 2008, investigators learned that Moore was supplying the cash for the ATMs himself, specifically using $20 bills. He had not reported this cash to his accountant as revenue coming in to the club.
The order gives some insight into the club bookkeeping:
Officers who executed the search warrant also found two dancewatcher books that proved to be key pieces of evidence at trial. The two books provided an accurate picture of the club's earnings from lap dances and fines during July and August 2005, as well as December 2007 through February 2008. By extrapolating averages from these two time periods, investigators were able to calculate Moore's estimated under-reported income for the tax years at issue. From Moore's LA Diner bank records, investigators were able to determine the amount of cash flowing through the ATMs into the club. By analyzing his reported income, including cash, investigators found a significant shortfall between the amount of money which was withdrawn from the ATMs and all reported cash Moore had available to stock the ATMs.
"Dancewatcher books?" Is "dancewatcher" a job title now? And the President says ATMs destroy jobs...
Mr. Samuel J.T. Moore III won't be watching dances himself for awhile. The Richmond Times-Dispatch reports that he has been sentenced to 6 1/2 years in federal prison on tax charges.
Cite: United States v. Samuel J.T. Moore III; No. 3:10-cr-00249
Paul Neieffer reports "Women Own 47% of Iowa Farmland."
I think this trend will continue and there may be a good chance that this percentage may be in excess of 50% at some point in the near future. Women appear to express a desire for strong conservation in their stewardship of the land, but sometimes are not sure how to most effectively carry this out.
That may be true, but I think that the desire to make sure the checks come regularly from the farm manager knows no sex boundaries.
Roger McEowen reports.
Tax Policy Blog: Nevada Film Tax Credit Proposal Dead
Why on earth would a state with no income tax be granting tax credits? Maybe they've learned something from Iowa's mistakes.
Interesting things can happen when tax refunds go astray. Peter Pappas passes on a tale of a California man who was happy to find somebody else's $110,000 tax refund in his bank account. The Orange County Register reports on the arrest of Stephen Reginald McDow:
The victim, identified by prosecutors as Michelle D., 67, of Los Angeles, electronically filed her 2009 tax return in August 2010, expecting a $110,000 refund to be directly deposited into her bank account, prosecutors said.
She inadvertently provided the number of a Citibank account that had been closed in 2004, but which was later reassigned to McDow, according to a news release from the Orange County District Attorney's Office.
When they figured out the problem some months later and approached Mr. McDow for the money, he is alleged to have told the rightful owner that he had spent most of it -- by one account, on repaying student loans and home mortgages.
- Double check your tax return direct deposit information. The IRS isn't required to make you whole if your refund goes astray because you told them to send the money to the wrong account.
- If you suddenly find a $110,000 in your bank account that you weren't expecting, don't spend it right away. If it's not yours, the owner will probably show up looking for it.
The TaxProf has a roundup.
A client forwards this e-mail:
It's a scam, of course. The IRS does not send notices via e-mail. If you have a refund coming, they'll just send you a check. If you get anything like this, delete it, and don't click any of the links; the link will either try to collect your bank information to loot your account, or it will dump a bunch of malware on your computer
Few things take the joy out of taking on a new client like finding that they have been taking improper deductions. Even worse is when they say "we've been audited and the IRS didn't say anything." The IRS isn't bound by its old mistakes, as a Minnesota couple learned yesterday in Tax Court.
The couple took an IRA deduction on their 2007 return. Unfortunately for them, they had no wage or self-employment income. You can only take an IRA deduction if you have such "earned" income. Ah, but they had been audited!
Petitioners contend that respondent determined the same issue in petitioners' favor as to 2006, thereby establishing precedent. However, each taxable year stands alone, and the Commissioner may challenge in a succeeding year what was condoned or agreed to in a previous year. Auto. Club of Mich. v. Commissioner, 353 U.S. 180 (1957); Rose v. Commissioner, 55 T.C. 28 (1970). Thus, respondent's concession of or failure to challenge the IRA deduction in a prior year does not necessarily entitle petitioners to the deduction in subsequent years.
If the deduction is improper, you don't get a permanent private exception for it just because the IRS missed it before.
Via the TaxProf.
The real question is where we are on the Laffer Curve. Larry [Lindsey] did find, by the way, that the cut in the top income tax rate from 70% to 50% did generate higher revenue than otherwise. So the highest-income people were in the prohibitive region of the Laffer Curve.
Some folks still would support the 70% rates even though they reduce tax collections, just because.
When they work, a "facade easement" is the tax law's version of having your cake and eating it too. A "facade easement" is an agreement between a property owner and a government or a non-profit to not alter the appearance of a historic structure. These can generate a charitable deduction if properly appraised and reported. The building owner still owns the building, but just agrees not to make changes that probably wouldn't be made anyway.
These are legal, but the potential for abuse is obvious, which may be why the IRS doesn't care for them. Now they are going after an outfit that promotes them, reports Janet Novack:
The Internal Revenue Service’s seven year campaign against questionable charitable deductions for the donation of historic building facade easements has ratcheted up another notch. On Tuesday, the Department of Justice filed a lawsuit seeking to enjoin the non-profit Trust for Architectural Easements from practices that allegedly promote improper and inflated easement deductions.
The story reports that the lawsuit has already been settled, but perhaps on terms that won't make people who have sorked with TFEA happy:
Tenenbaum [attorney for TFEA] said the settlement does not include a requirement for the Trust to hand over donors’ names. He declined, however, to disclose whether those names had already been given to the government during the course of its nearly year long investigation of the Trust. “I can’t get into any details, but exhaustive, voluminous amounts of information were provided to the Department of Justice as part of the investigation,’’ he said.
That sounds like a long way of saying "yes." Contributors to TFEA will find out if that 's the right answer soon enough.
From Andrew Mitchel's International Tax Blog:
In Notice 2011-54, the I.R.S. has provided an additional extension for persons having signature authority over, but no financial interest in, a foreign financial account in 2009 or earlier calendar years for which the reporting deadline was extended by Notice 2009-62 or Notice 2010-23. These persons now have until November 1, 2011, to file FBARs with respect to those accounts. The deadline for reporting signature authority over, or a financial interest in, foreign financial accounts for the 2010 calendar year remains June 30, 2011.
LInk: Notice 2011-54
Federal Tax Crimes Blog: Pre-2010 FBAR Filing Extension to 11/1/11 for Signatories Only
Congress failed this week to end the ethanol subsidy, largely because the subsidy is in form a tax credit. Grover Norquist therefore deems its elimination a "tax increase" and a violation of the Americans for Tax Reform's "no tax increase" pledge.
In real life, it's spending run through a tax return. The credit is refundable, as explained in IRS Publication 510 (page 24):
To the extent the alcohol fuel mixture credit, biodiesel mixture credit, renewable diesel mixture credit, alternative fuel credit, and alternative fuel mixture credit exceed taxable fuel liability, a payment is allowed and may be taken as a credit on Schedule C (Form 729), as a refund on Schedule 3 (Form 8849), or as an income tax credit...
So producers who have no taxes otherwise can file a form and get government money back, just like in a welfare office. Because the IRS functions as the welfare office, Mr. Norquist says that cutting the subsidy is a tax increase.
The episode provides a valuable lesson to corporate welfare seekers: get your subsidies through the tax code, so Grover Norquist will be on your side.
Iowa's tax climate gets a failing grade from the Conexus Indiana Manufacturing and Logistics 2011 report card. That makes sense; the Tax Foundation rates Iowa's busness climate as the 45th best out of 50 states. That fails, even on a curve.
Source: 2011 Conexus:Indiana Manufacturing & Logistics Report Card
Iowa fares better in other areas, but fares poorly in an area that could be fixed easily.
Peter Reilly rounds up tax cases involving Amway participants. He adds this bit of poetic advice:
You don't tug on Superman's cape
You don't spit into the wind
You don't pull the mask off that old Lone Ranger
And you don't take no Schedule C losses from an
arrangement with a company that IRS examiners
have on speed-dial.
The cases should make you think twice about multi-level marketing as a tax shelter.
Paul Neiffer explains how sellers of business property can use the like-kind exchange provisions to push their tax back a year -- even if no replacement property is acquired.
There's a new Cavalcade of Risk up at Political Calculations!
The fine insurance and risk-management posts assembled include Hank Stern's coverage of a man being sued for allegedly inflating his net worth to get $50 million in life insurance coverage.
A private equity player hired a tax preparer to do his 2006 return. He picked up his return showing $29.2 million of adjusted gross income on October 15, the final extended due date. Unfortuantely the preparers left a $3.4 million gain off of the return, even though they had his 1099 for it. In due time the IRS computer matching caught the omission, and the IRS hit the taxpayer with a $100,000 penalty for leaving off the gain.
The Tax Court said hiring a preparer didn't get him off the hook:
Mr. Woodsum terminated the swap ahead of its set termination date because his watchful eye noted that it was not performing satisfactorily as an investment. That is, when his own receiving of income was in question, Mr. Woodsum was evidently alert and careful. But when he was signing his tax return and reporting his tax liability, his routine was so casual that a half million-dollar understatement of that liability could slip between the cracks. We cannot hold that this understatement was attributable to reasonable cause and good faith.
The case reminds us that the law holds the taxpayer accountable for what's on the return, paid preparer or no. It also reminds us that it can be dangerous to wait to the last minute to file. A complicated return picked up on October 15 is a mistake waiting to happen.
Meanwhile, I suspect that the preparer's malpractice carrier will be involved shortly, if it isn't already.
Cite: Woodsum, 136 T.C. No. 29
A nice little article from Bloomberg/Business Week has some common-sense advice for S corporation shareholders, touching on compensation, basis tracking, and documenting shareholder loans. Check it out.
Via Twitter feed of @smtcpa
It's hard to be imagine a more awkward social situation than to be an improsoned former policeman. That probably made the sentence of a tax-cheating Illinois police chief come as a relief. From BND.com:
Former Alorton police chief Robert Cummings Sr. has been sentenced in federal court to six months of home confinement with electronic monitoring and four years probation for filing fraudulent tax returns.
Cummings, 43, had pleaded guilty Feb. 24 to one count of filing a false tax return, court documents state. He was also ordered to pay $24,925 in restitution to the IRS.
Under federal sentencing guidelines, Cummings could have been sentenced to six to 12 months in prison; prosecutors had asked for six months in prison.
And it's not really home confinement like you might think:
Home confinement does not prohibit Cummings from leaving his home for work, religious activities, doctor appointments and for other probation-approved reasons, Evanko said.
The police chief's lawyer used an "other poeple are worse" approach in arguing for a low sentence:
Evanko played down his client's crime, saying Cummings was just trying to support his family on a small salary and had taken the advice of a tax preparer who eventually went to prison.
Evanko cited national political figures who have not been charged with crimes despite issues with their taxes.
It would be interesting to see if he accepted that sort of a defense when he was arresting somebody.
Image via Wikipedia
New Jersey's proud
pencil pen-and-paper return holdout Robert D. Flach has a new "Buzz" roundup of posts from around the tax blog world today. Check it out.
Good news for gentleman farmers everywhere. From a protest ruling by the Department of Revenue:
The protester owned a share of farmland that was sold in 2005, and claimed a capital gain deduction on the Iowa individual income tax return. The Department denied the deduction and issued a Notice of Assessment. The reason for denial was the protester did not meet the material participation requirement for the deduction.
Our review finds the land was held in CRP for the ten years immediately prior to sale. Department rule 701 IAC 40.38 states that if individuals actively manage farmland placed in the CRP program by directly participating in seeding, mowing, and planting the farmland or by overseeing these activities, the owner will be considered to have had material participation in the farming activity. Therefore, the protester qualifies for the deduction. The Department will cancel the assessment.
Iowa doesn't tax capital gain income from the sale of a business or of business real estate if the seller has held the property for ten years and has "materially participated" in the business for ten years. This low threshold for CRP land will be very helpful for a lot of taxpayers.
Cite: Parman, Doc. Reference 11201011
It's about safety, not money, right?
A mobile speed camera in use for about a week is out of commission after a traffic accident.
Des Moines police said an 18-year-old driver lost control about 4 p.m. Friday in the 1500 block of Beaver Avenue and sideswiped the white Ford Explorer that carries the camera.
The teen, who was not identified, then hit a tree. He was cited for failure to maintain control.
The mobile unit was turned on earlier this month. Officials have said it's intended to improve safety for drivers.
Yes, because nothing is safer than parking alongside a busy roadway. Try it yourself sometime!
Related: Des Moines readies revenue cameras
The greatest job creation comes from small, rapidly growing regional, national, or international start-up firms. Very little job creation comes from mom & pop businesses and large corporations. Start-ups benefit the most from tax simplification and lower tax rates allowing them to allocate capital to the areas of their businesses that require investment as needed. SF209 focuses and concentrates those decisions to capital equipment, ironically not recognizing investment in employees as a benefit, that are most beneficial to large entities that have the luxury of determining when and where to invest to exploit various tax preferences.
There's a lot of truth in the first three sentences. I disagree with the last one.
SF 209 attempted to couple Iowa's rules for capital equipment expensing and depreciation with the federal rules for 2010 and 2011. The coupling eventually passed in SF 512. In general, conformity is good. Even if you disagree with the federal tax policy behind a deduction, the burden imposed on Iowa taxpayers by making them compute taxable income differently from federal more than makes up for the "correction" of perceived policy mistakes.
TruthIowa.com is absolutely correct in saying "Start-ups benefit the most from tax simplification and lower tax rates allowing them to allocate capital to the areas of their businesses that require investment as needed." It's not just true about start-ups; it's true about everybody who doesn't have expensive lobbyists under the dome. I think Truthiowa.com might find a lot to like in The Quick and Dirty Iowa Tax Reform Plan.
You have gotten on the wrong side of Jr. Deputy Accountant:
The funny part about all of this is that somehow it always ends up back at the evil speculators and terrible Big Oil who has us by the throat. As if destroying our engines with a food item when folks are starving halfway around the world makes any sort of sense.
It may be too late for the Senator, but it may not be too late for the Senate.
Dan Meyer ponders at Tick Marks:
The alternatives that I can see as plausible are:  a quite easy exam, perhaps designed on individual topics only. This is the most cynical option which basically says that the whole purpose of tax preparer registration is money grabbing by Uncle Sam;  a moderate difficulty exam (but significantly watered down from the EA exam) which would allow registered tax preparers (hereafter RTPs) ability to practice individual income taxes (and possibly or possibly not partnerships, LLC/LLPs and S Corporations on a limited basis as well--probably not C corporations, trusts and gift/estate returns);  a similar scope to  but somewhat more rigorous (though still less rigorous than the EA exam). Under , there would be a higher likelihood that partnerships/LLCs/LLPs/S Corps would included in permitted practice for RTPs;  something like option  or  with a retest requirement (perhaps every five or ten years).
I think the cynical answer is the best bet, simply because a truly hard exam will destroy the tax prep industry. Dan's money is on 2 or 3.
Oh, and it's not about the money. It's about the power.
Farmers have their own special place in the bankruptcy law: Chapter 12. Two circuit courts have opposite holdings on whether Chapter 12 allows the discharge of post-petition taxes on farm bankruptcy sales. Yesterday the U.S Supreme Court agreed to settle the issue. It's too technical and obscure, but not for Roger McEowen. Roger, my partner in crime at the Farm Tax Schools, was even cited by one of the circuit court decisions. From Roger's mouth to Anthony Kennedy's ear...
It rained hard over lunch here in Des Moines, but it poured inside The Partnership Building at 7th and Locust:
It's no fun to start your week that way.
The Mercatus Center, a free-market think tank, ranks Iowa the 13th most free state in the union. Mercatus says their new study "comprehensively ranks the American states on their public policies that affect individual freedoms in the economic, social, and personal spheres."
Map via Mercatus Center
In other news, the company owning Chicago's two big futures exchanges is thinking of fleeing Illinois as a result of thier recent tax increases (via Instapundit). With an extensive financial industry, a location in the center of the ag industry, and lots of available space downtown, Des Moines would be a natural home for the commodities exchanges. Iowa's only drawback? The sixth-worst tax business climate in the 50 states. This is a a great opportunity for the legislature should do something useful in its session-that-won't-die and enact the Quick and Dirty Iowa Tax Reform Plan right now. Even if it doesn't seal the deal for the exchanges, it would still do a lot more for Iowa's prospects than any tax bill they've passed in the past 20 years.
Pater Pappas has more coverage of the Mercatus Study.
The Personal Holding Company Tax arose during the Depression, along with the Accumulated Earnings Tax, to force corporations to disgorge their accumulated cash to goose a staggering economy (sound familiar?). Like farm subsidies, another Depression program, these taxes still are around 70 years after the Depression ended. Over time, the justification shifted from stimulating the economy to preventing the shifting of income to an "incorporated pocketbook."
The Tax Court this week reminds us that the PHC tax still has teeth. A corporation filing a consolidated return misapplied an obscure portion of the PHC tax rules and understated the PHC tax. The corporation used an in-house professional to do its returns; the court ruled that reliance on an in-house preparer doesn't provide "reasonable cause" for botching taxes. As a result, the taxpayer also had to pay a 20% penalty.
There are probably thousands of C corporations out there subject to the 15% PHC tax that don't know about it (the tax doesn't apply to S corporations, but they have something similar that applies to former C corporations). The tax can apply to C corporations where five or fewer shareholders (relatives may be counted together) own over 50% of the corporation's stock. Some warning signs:
- A corporation other than a bank that has a big portion of its income as interest or dividends.
- A corporation that has sold its business and now just has investment assets.
- A corporation that owns substantial rental real estate on a net-lease basis, incurring minimal expenses other than interest, depreciation, rent and property taxes.
If the corporation is closely-held, the tax can apply separately to subsidiaries in a consolidated return, even if the group as a whole has active business income. If this sounds like it might be you, talk to your tax advisor. And if you want a shot at avoiding penalties, make sure it's an outside advisor.
Cao filed 22 false liens in the public records of the state of Nevada and Clark County, Nev., against SEC attorneys, U.S. District Court Judges, U.S. District Court Magistrate Judges, the U.S. Attorney for the Southern District of California, Assistant U.S. Attorneys, U.S. Secret Service special agents and special agents of the IRS. Each lien alleged that the lien victims were “debtors” of Cao for hundreds of millions of dollars.
Oh, and he claimed $20 million in false tax refunds. Needless to say, things went badly; sentencing is set for September.
In case you've missed it, the ISU Center for Agricultural Law and Taxation has released the dates and locations for this year's farm tax schools:
Oct. 25-26 - Mason City
Oct. 31-Nov. 1 - Sheldon
Nov. 2-3 - Muscatine
Nov. 14-15 - Denison
Nov. 17-18 - Ottumwa
Nov. 21-22 - Waterloo
Dec. 5-6 - Griswold
Dec. 12-13 - Ames
The first day will feature the Smothers Brothers of the tax world -- me and Roger McEowen -- along with IRS Taxpayer Liason Kristy Maitre. Day two features either Neil Harl or David Bibler, James Goodman and Lee Wilmarth, depanding on location. Plan your trips today!
The Tax Court yesterday brought to our shores a bunch of endorsement income that Retief Goosen had reported as non-U.S. income. The TaxProf has the details.
Cite: Goosen, 136 T.C. No. 27
The IRS has published a list of tax-exempt organizations that have lost their tax exemption for failure to file information returns with the IRS for three straight years. The IRS has also published an automatic procedure (Rev. Proc. 2011-33) for such organizations to regain their exempt status.
The dozens of Central Iowa organizations that have lost their tax exemption according to the list include the local Chapter of the National Organization for Women, local chapters of AFL-CIO and AFSCME, and the Des Moines Mens Chorus. One organization that may be a bit red-faced at their revocation is the Internal Revenue Service Employees organization, with an address listed at PO Box 1337, Des Moines, 50305.
The Iowa House of Representatives approved a proposal (HF 697) to allow Iowans to take advantage of 2010 tax breaks that weren't enacted until Apriil 2011 without amending returns. The proposal would give taxpayers the option of claiming their additional Sec. 179 expenses, educator expenses and higher-education deductions for 2010 on their 2011 Iowa returns. Otherwise the taxpayers could only claim the deductions by filing amended 2010 returns.
The proposal was passed as part of a broader budget bill, which puts its future in doubt. The Washington Examiner reports:
Democrats warned that Republicans were wasting their time on the House measure, saying the proposal will have no future in the Democratic Senate.
"This bill is dead as soon as it hits the Senate," said Rep. Bruce Hunter, D-Des Moines.
No progress has been made in bargaining between the House and Senate over a new state budget, though the fiscal year ends on June 30.
The Los Angeles Police Commission Tuesday rejected a proposal from police officials to continue the city’s red light traffic-camera program, a move that would shut down the controversial cameras in days unless the City Council opts to strip the commission of its authority on the issue.
Familiarity hasn't reconciled Los Angelenos to the revenue cameras:
"We have to ask, what is the benefit to the public? What is the downside?" said Commissioner Debra Wong Yang. “And I’m not convinced from looking at the numbers that these cameras work."
Those sentiments were echoed by several members of the public who attended the meeting to urge the commission to do away with the cameras, which seem to trigger a seemingly boundless amount of frustration and anger among many drivers in Los Angeles, who rant on Internet chat rooms and at cocktail parties about the technology’s unfairness, usefulness and safety.
“It’s something that angers the crap out of me every time I get in my car,” said Hollywood resident Christina Heller, 27.
The Des Moines city council members who approved the cameras will have to hope they turn out to be more popular here.
Kay Bell reminds us that calendar-year taxpayers need to get second quarter federal tax payments in by Wednesday. She includes a helpful list of mailing addresses for 1040 payments. Corporations should pay using EFTPS.
The Iowa legislature didn't get around to deciding what Iowa's 2010 income tax law was until April of this year. Thousands of Iowa returns were filed without claiming deductions enacted by the later-than-last-minute legislation (SF 512). Today the Iowa House is scheduled to debate a proposal to allow taxpayers the option of claiming those breaks on their 2011 returns in place of filing amended 2010 returns.
Amendment H-1735 to HF 677 -- the omnibus budget bill -- would allow taxpayers to take the following 2010 tax breaks on 2011 returns:
- The Section 179 deduction of up to $500,000 for otherwise depreciable equipment. The Iowa 2010 limit had been $134,000;
- The deduction for higher education expenses; and
- The $250 educator expense deduction.
This is a great idea. Amending an Iowa return to get a $250 educator deduction is hardly worth the bother of amending when you at best get a $22 refund. An S corporation claiming the increased Section 179 deduction may have multiple owners that have already filed 2010 returns; it may be a better deal to just hold the deduction over to 2011 than to pay to amend the 2010 Iowa return and all of the owner IA 1040s.
The bill also would allow taxpayers to amend their 2008 Iowa returns to claim the same teacher deductions, higher education expenses and the optional itemized sales tax deduction allowed on federal returns for that year. This is a strange provision, re-opening an old year for deductions that taxpayers have given up on. In fact, many taxpayers who accidentally claimed those deductions on Iowa returns for those years because they were on the federal return have paid assessments issued by the Department of Revenue for those items; they would then have to amend their returns to recover refunds for the deductions they claimed in the first place.
There apparently is no budget deal yet, so the passage of these provision can't be assumed. Still, it's good to see legislation that could save the expense of amending returns for small refund amounts.
An underreported story in the L.A. Times:
Executives from four large U.S. companies told lawmakers that they would give up lucrative tax breaks in exchange for significantly lowering the 35% corporate rate, spurring efforts to overhaul the tax code.
Executives from Boeing Co., Sears Holding Management Corp., Emerson Electric Co. and Perrigo Co., a leading pharmaceutical manufacturer, said Thursday that they prefer the simplicity and certainty of a rate as low as 25% over the complexity of calculating frequently shifting tax breaks.[...]
Tax Analysts coverage of the story ($link) shows that these executives are even willing to give up sacred cows like the research credit:
Other panelists, however, singled out popular tax expenditures like the research credit as an example of expenditures that corporations would relinquish for a reduced corporate income tax rate. The complexity of the research credit and the nearly annual debate over whether it should be extended make Boeing prefer a "significantly lower rate," [Boeing President James] Zrust said. Last year, Boeing spent almost $4 billion in research and development, he added.
The research credit has also created several compliance headaches for Boeing. According to Zrust, more than 30 IRS agents are working on a continuous audit of the company. In December 2010, the company resolved an IRS audit that involved several issues, including the research credits from 1998 to 2003, he said.
So there is a constituency for a tax reform with a broad base and low rates. But there will be opposition, based on this from the Times:
But 17% said they preferred to keep their tax breaks no matter how much the rate was cut
Opposition would include whole industries, like the "renewable energy" industry and the low-income housing credit lobby -- not to mention the industry of tax credit consultants. Like all tax reform efforts, the next round of tax reform will pit those riding the gravy train against those who are pulling it. But the willingness of a big research credit recipient like Boeing to trade its breaks for lower rates is a good sign. At the state level, the Quick and Dirty Iowa Tax Reform Plan shows the way.
Via Tax Policy Blog.
Paul Neiffer explains how depreciation "recapture" on equipment works at Farm CPA Today.
...and brain surgery skills may not apply well to tax planning, as a neurosurgeon learned in Tax Court yesterday.
The surgeon took an unusual approach to his practice by setting up as a union shop. It seems like a strange setup, though there is something strangely fitting about a surgeon being part of a plan affiliated with the "Union of Needletrades, Industrial and Textile Employees, Local 2411." But working class solidarity probably wasn't the real motivator for the union shop. According to the Tax Court opinion,
The corporation agreed to provide eligible employees with a death benefit only (DBO) plan organized through the American Workers Benefit Fund (AWBF), a welfare benefit fund established between AWMCG and Local 707.
The agreement provided that upon a covered employee's death, AWBF would provide the employee's designated beneficiary with an amount equal to eight times the employee's annual income up to $6 million. However, AWBF's obligation to pay a death benefit ceased if the corporation's covered employee was voluntarily or involuntarily terminated or retired; if the corporation ceased making contributions; or if the master contract between the union and the master contract group was not renewed.
The union bought an insurance policy on the neurosurgeon, and it eventually built up a cash value of $400,000. The union plan had a hardship loan provision, and soon hard times of a sort arrived:
On May 20, 2002, Southland notified petitioner's insurance agent that the maximum available distribution from policy No. 8889 was $400,000 and that any greater distribution would cause the policy to lapse. On July 11, 2002, petitioner submitted to UEBF an application for a loan of $400,000 for "unexpected housing costs".
No evidence was presented as to what $400,000 in unexpected housing costs would be. And that turned out to be a problem. The IRS said that the taxpayer never intended to repay the $400,000, so it was a taxable distribution instead of a loan.
The Tax Court looked at several factors to see whether it was a legitimate loan. The court found the evidence for loan treatment to be lacking. For example:
Despite the requirements within the trust agreement, the parties failed to contemporaneously memorialize the indebtedness when the money was distributed to petitioner. Moreover, the record further reflects that neither petitioner nor UEBF adhered to the terms of the promissory note or the trust agreement that governed the transaction. UEBF failed to charge a market rate of interest, petitioner did not make quarterly payments as required under the promissory note, and UEBF did not attempt to collect the amount owed or any portion thereof after petitioner defaulted.
For the foregoing reasons, the Court finds that neither petitioner nor UEBF strictly complied with the terms of the loan agreement or the promissory note. Thus, the Court gives the promissory note little weight. This factor indicates the parties did not intend to establish a debtor-creditor relationship at the time the funds were advanced.
The Moral? If you want a cash withdrawal from a business or a benefit plan to be taxed like a loan, you need to treat it like a loan. Actual loan payments can help loads.
Iowa has the sixth worst business tax climate in the U.S., according to the Tax Foundation's State Business Tax Climate Index.
Worse, if you want to down a stiff martini to help forget about our business tax climate, Iowa pairs that dubious distinction with the sixth highest distilled spirits excise tax in the land:
By weighting the business tax climate index and the spirits tax rates equally in a combined index, Iowa has the nation's worst Booze Goggle-adjusted State Business Tax Climate. It's all another high-proof argument for the Quick and Dirty Iowa Tax Reform Plan.
Actor Wesley Snipes was unable to play a victim well enough to get the U.S. Supreme Court to hear an appeal of his tax crime conviction. That means Mr. Snipes will complete his 3-year sentence on or about July 19, 2013. He has the consolation of knowing that after he is free, his former advisor Eddie Kahn will be securely held in the arms of the Bureau of Prisons until sometime in 2026.
Related: Wesley Snipes: victim of the system?
It's way too hot out there today, so grab a waffle cone and chill with the new Carnival of Taxes, where Kay Bell rounds up the latest and greatest in tax blogging.
Think twice before you hire tax-increase activists to help you with your taxes. Based on this report from Radio Iowa, at least one is unusually uninformed on Iowa tax law. Here he manages to pack four errors into two sentences:
David Goodner, with Iowa CCI, says loopholes in the corporate tax code allow big corporations on Wall Street to hide their profits.
“Here in the state of Iowa, (corporations) can actually deduct their federal taxes as a liability on their state taxes. You know, I can’t do that…and CCI and SEIU members have to pay their federal taxes and their state taxes,” Goodner said.
First: "Deduct their federal taxes as a liability?" That doesn't even make sense. You deduct expenses, not liabilities. Expenses are on the income statement, while liabilities are on the "balance sheet." The income statement tells you how much money you make or lose in a given period, while the balance sheet tells you how much you own and how much you owe. They're different things.
Second, Banks in Iowa pay a "Franchise tax" on Form IA 1120-F. There is no deduction for federal tax expense in computing the bank franchise tax -- let alone a deduction as a federal tax "liability."
Third, Individuals in Iowa do get to deduct their federal income tax expense. In fact, there was a little debate over that in the 2009 legislative session.
Fourth, non-bank corporations, like the holding company for Wells-Fargo Banks, actually get to deduct less of their federal tax expense on their Iowa returns than individuals. While you can deduct 100% of your federal tax expense in computing personal taxable income, non-bank corporations only get to deduct half of their federal taxes in computing taxable income -- which in Iowa is then subject to the highest corporate rate in the nation, 12%.
Mr. Goodner goes on:
'"But, it’s not in the back pockets of a Head Start teacher or the lunchbox of a preschool kid or the Social Security or Medicare account of a senior,” Goodner said. “That money is on Wall Street and when those corporations start paying their fair share, we can get this country back on track."
The fun will really begin if Mr. Goodner tries to draw some funds out of his Social Security or Medicare "account."
KFC has appealed for a U.S. Supreme Court hearing on the ruling that it is liable for Iowa taxes based on its franchise agreements with Iowa KFC restaurants. The Tax Executives Issues has filed a brief urging the U.S. Supreme Court to hear the case and reverse the Iowa Supreme Court:
The core issue in this case is whether the Commerce Clause of the United States Constitution prohibits a State from imposing its corporate income tax on businesses with no connection to the State other than having customers located there. The Iowa Supreme Court says yes, contending that taxpayers cross the Commerce Clause’s jurisdictional threshold merely by licensing intangible property to unrelated persons in the State — by its so-called economic pre-sence in the State. Amicus Tax Executives Institute disagrees, believing the decision below is flawed and casts an ominous shadow over the protections accorded interstate businesses by the Commerce Clause.
Of course, even a U.S. Supreme Court decision might not settle the issue, as the Iowa Supreme Court considers U.S. Supreme Court decisions to be only advisory.
The Cavalcade of Risk is celebrating its Fifth Anniversary!
Hop a freight* right now to Chatswood Consulting, the host of this edition of the roundup of the best the blog world has to offer on insurance and risk managment.
*The Tax Update uses this as a figure of speech. We in no way endorse the inherently unsafe activity of train-hopping. So there.
... might be all you have left after you use one of the cable-TV "tax debt reduction" outfits. Eva Rosenberg explains at the Smartmoney Tax Blog.
Great insight from Peter Pappas: Bottom 5% of Americans Earn More than top 5% of Indians
The June 30 deadline for reporting foreign bank accounts to the Treasury looms. The reports have to be filed on form TD 90-22.1 no later than June 30 -- and should be filed sooner to be safe. Failure to file timely can result in horrendous "shoot-the-jaywalker" penalties of up to half the account balances.
The IRS has extended the deadline for a small group of taxpayers otherwise required to file. The break applies to certain employees with signature authority over a company account, or an account of a related company, but who have no ownership of the account themselves. The deadline is extended to June 30 of 2012 for those taxpayers.
Stacie Clifford Kitts has more.
The report details recent suspensions or eliminations in Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey, and Washington. Additionally, programs are facing additional restrictions or scrutiny in Alaska, Connecticut, Georgia, Hawaii, Michigan, Missouri, New Mexico, Rhode Island, and Wisconsin.
A report from the Harvard Business School says that fighting tax fraud might be easier if taxing agencies put the taxpayer signature line at the top of page 1, rather than at the bottom of the page (or, in some states, buried somewhere in the middle of page 3 or later). From "Signing at the Top: The Key to Preventing Tax Fraud?":
The key, according to the researchers, lies in increasing ethical salience: inducing people to pay greater attention to their moral standards and examine the integrity of their behavior when it counts the most.
"A signature is a way to highlight the fact that you're about to do something important, and that it's going to be a reflection of the self," says Francesca Gino, an associate professor in the Negotiation, Organizations & Markets Unit at HBS. "Attaching a signature to a pledge of honesty is a way of effectively linking identity to morality."
They did some experiments:
The 101 participants—mostly students—received instructions to complete an incidental problem-solving task, which included the following information: "For the problem-solving task, you will be paid a higher amount than what we usually pay participants because you will be taxed on your earnings. You will receive more details after the problem-solving task." The instructions went on to say that the participants would receive a tax credit for the cost of their commute to the lab.
After the problem-solving exercise, the participants went into another room and filled out a "research study tax return" form based on the IRS's Form 1040. As with the previous experiment, some participants were asked to sign an honesty statement at the top of the form, while others were asked to sign the statement at the bottom. The experiment also included the added wrinkle of a control group, in which the forms had no place for a signature at all...
For the signature-at-the-top group, 13 out of 35 participants cheated on their tax forms (37 percent). For the signature-at-the-bottom group, 26 out of 33 participants cheated—79 percent. This percentage was actually higher than the control group participants who didn't sign at all (64 percent, or 21 out of 33).
While interesting, it's not clear that moving the signature line would have much effect in an e-filing world. When you sign the Form 8879 e-file authorization, you don't even sign the return itself. When you have another person prepare the return, as most people do now, it's not likely that the "sign-at-the-top" solution will do any good. The experimental forms were also done with paper and pencil, and almost nobody does that any more.
But our employee expense reports are another matter...
Cat fanciers have had a tough time in Tax Court this year. Back in February a West Des Moines taxpayer lost business deductions attributable to her cat-ranching business. Now a California cat lover has lost thousands of dollars of charitable contribuiton deductions for expenses she incurred caring for feral cats after neutering surgery. Kay Bell has the catastrophic details.
The case actually has some lessons, even for us dog fans. If you are going to deduct out-of-pocket expenses for charitable activity of $250 or more, the charity has to acknowledge the expenses in writing the same as for cash contributions. No acknowledgement, no deduction.
Update: maybe this makes it all worth it somehow:
Like any widow, Carol was devastated because she lost the love of her life and her son’s father. But soon Carol had much more to cope with than her grief and new life as a single parent. As she was forced to take over her family’s legal and financial responsibilities, as well as run Howard’s restaurant on her own, Carol discovered that her husband had secrets, and one of them, an almost $3 million debt to the IRS, threatened to derail her entire life. And even though Carol didn’t know anything about the tax fraud—finances had always been Howard's department—no one cared. As his surviving spouse, legally, Carol was responsible.
The story is in a new book called Innocent Spouse: A Memoir, available at bookstores and on Amazon and Kindle.
It brings to mind a Tax Court case a few years ago involving a Montezuma, Iowa lawyer named Roger Sunleaf. From the Tax Court opinion:
Shortly after Mr. Sunleaf's death, his former secretary contacted the coexecutor of Mr. Sunleaf's estate (petitioner's niece) about alerting petitioner to her poor financial condition. Mr. Sunleaf's former secretary had worked for him for 15 years and knew Mr. Sunleaf was in trouble with the IRS and with the family finances. Petitioner was unaware of the financial situation while Mr. Sunleaf was alive because he swore his secretaries to secrecy, and he handled nearly all of the family's financial affairs.
When petitioner learned of the financial mess that Mr. Sunleaf had caused, she was shocked. At the time of his death, Mr. Sunleaf's office, his desk, floor, chairs, and conference table were piled with mail. There were unopened envelopes from creditors, the IRS, and banks.
Mr. Sunleaf was able to keep petitioner unaware of the financial mess because all mail addressed to petitioner and Mr. Sunleaf was delivered to the post office in Montezuma instead of their home. Petitioner never picked up the mail at the post office; rather, Mr. Sunleaf picked up the mail and brought home only magazines and personal letters.
Even after she liquidated the family assets to pay the taxes and moved into a trailer, the IRS kept hounding Mr. Sunleaf's widow until the Tax Court ruled her an "innocent spouse," forcing the revenuers to back off.
The author of Innocent Spouse, Carol Ross Joynt, finally got off the hook without going to Tax Court. Attorney Robert Wood writes:
That makes Carol one of the lucky ones. Many women face a kind of IRS inquisition. The putative innocent spouse puts her own character and actions in issue by claiming she had no idea what was going on. Yet the IRS seems to go overboard, often painting an abused spouse as a willing accomplice to her tax-cheat husband or a feckless ignoramus spending money she should have known was owed for taxes.
Stories like this point out the dangers in the power the government already has, and tell us that we should be very reluctant to give them any more.
Peter Pappas has more.
A federal appeals court has upheld the tax evasion conviction and sentence of a Florida dentist who relied on the inane tax protester theories of American Rights Litigators, the outfit that helped get Wesley Snipes where he is today. From the opinion:
Maggert, a dentist, worked for several dental offices as an independent contractor. In 1998, Maggert and his wife attended a seminar by American Rights Litigators ("ARL") and Eddie Kahn at which they were told they did not have to pay federal income tax. Maggert relayed this information to his accountant, who counseled Maggert against ARL's advice and ended their professional relationship when Maggert persisted.
He then proceeded with some unorthodox business structure planning:
Beginning in 2002, Maggert instructed the accountants for the dental offices where he worked to make his paychecks payable to Total Business Systems, LLC, a Florida corporation, or to Mark's Word of Faith International, a Nevada corporation.
The articles of incorporation for Mark's Word of Faith International listed Maggert as the "Presiding Patriarch (Overseer)." Maggert's wife signed the articles of incorporation as a witness and "Scribe." Maggert's wife admitted there was no such religious organization and that Maggert was not a spiritual leader or priest.
No word if there were non-Presiding Patriarchs.
Florida Dentists seem to have had more than their share of tax problems. On the plus side, the dental health of the federal prison system may be better than it has ever been.
Politicians love to pay for goodies for everybody with money from almost nobody. That's why taxes on "the rich" and corporations have a powerful allure -- the rich guy is usually somebody else, and the corporation doesn't vote.
Unfortunately, the rich guy is an unreliable source of revenue. If you count on a few wealthy taxpayers for a lot of your income, it will be a lot more volatile than a broader-based tax. States like California are learning this the hard way.
Other factors being equal, a 10 percentage point increase in a state’s reliance on the corporate income tax tended to lead to an 8.7 percentage point increase in the size of a state’s budget gap (6.78 standard deviations).
Attemps to jack up state corporation taxes will always disappoint.
Usually the Tax Court issues a "reported" opinion when it either is addressing a new issue or it wants to send a message. Yesterday they sent a message with an reported opinion explaining "Why we usually decline to refute frivolous anti-tax arguments":
Experience shows that a given frivolous argument may have little actual importance to the person making it. Frivolous anti-tax arguments are often obviously downloaded from the Internet; and by cut-and-paste word processing functions, these arguments are easily plunked into a party's filing. In other instances a promoter of frivolous anti-tax arguments is feeding those arguments to a litigant who adopts them uncritically and submits them to the Court. For all a court can tell, the litigant may not even have carefully read the arguments he submits.
Petitioners who make frivolous anti-tax arguments are sometimes intelligent people, but they tend to show great ignorance about the legal matters they argue. Tax defiers have learned to admit to the Court (as Mr. Wnuck did) that they have no legal background or training. The admission is often manifestly true. However, this admission is evidently made only to induce the Court to be lenient in overlooking the pro se litigant's procedural lapses and to incline the Court to be liberal in construing his pleadings. The admission of ignorance does not indicate a willingness to accept information from someone who does have that background and training in tax law.
The frivolous argument, made from this position of witting and willful ignorance, seems to be merely an incidental ornament that adorns an article of faith -- namely, the belief that I don't owe taxes. The tax defier firmly holds that postulate above and apart from any arguments. Anything in favor of that postulate may be advanced, no matter how silly; anything against it can be ignored. If a given frivolous argument is decisively rebutted, then it may or may not be retired; but even if the individual argument is retired, the cause is not abandoned. Thus, the specific argument hardly matters even to the litigant.
Consequently, the value of answering frivolous anti-tax arguments -- even the subjective value to the individual litigant -- is often doubtful.
The court provides some other reasons why it doesn't bother explaining the obvious, and uses the hapless petitioner to illustrate:
Mr. Wnuck contends that the term "United States" therefore excludes everything else (such as the 50 States) and that his services performed in Pennsylvania (not in Puerto Rico, etc.) were not performed in the "United States" and therefore did not yield taxable wages. His argument fails for obvious reasons:
a. "Includes" does not mean "includes only".
b. The cited statute does not apply.
c. The cited case contradicts the argument.
There's a lot more of this in the case. While Mr. Wnuck loses, and gets hit with a $5,000 penalty for pursuing frivolous arguments in Tax Court, he has the consolation of the assurance that his name will now appear in most every Tax Court frivolous return case for years to come.
Cite: Wnuck, 136 T.C. No. 24
Maybe not. Kay Bell reports on legislation that would disqualify boats from the deduction. It's not likely to pass by itself, but it might be an irresistable revenue raiser on a bigger bill sometime.
So the Antitrust Division of the Dpeartment of Justice is suing H&R Block for its attempted purchase of Iowa-linked TaxACT Software.
That's so funny. The federal government itself is doing more than anyone to restrict competition in H&R Block's market with the new IRS rules on tax preparers. It just issued final rules yesterday as part of this effort. The tax preparer regulation system was designed by a former H&R Block executive, and will push out of business many small seasonal preparers who don't want to deal with the cumbersome IRS preparer bureaucracy -- less competition for Henry and
Robert Richard (thanks, Everett!).
It's way too much to hope that the next antitrust suit names IRS Commissioner Shulman.
Christopher Bergin, Blocking Block
Tax Update: Tax Preparers, Bootleggers and Baptists
Professor Maule asks, I answer:
Yes it is. It is creepy, and it sends us down a slippery slope to where government enforces every traffic rule, from complete stops at stop signs to highway speeding, based on GPS locator information. It also undermines any attempts to use carbon taxes or gas taxes to restrict fuel use.
Related: Paying at the Pump: Gasoline Taxes in America, by the Tax Foundation.
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