Roth & Company, PC Tax Update Blog

Tax Update Blog: August 2011 Archives

« Previous · Tax Update Blog Home · Next »

Teaching a lesson in loyalty to the bureaucracy

August 31, 2011

Former film office Director was on the stand yesterday in his trial on Felony charges of official misconduct. This exchange reported in The Des Moines Register is an eye-opener:

Wheeler testified that he spent long days at the office in 2008 and 2009, frequently took film calls at his home and even fielded emails during his father’s funeral.

"Why would you do that?" defense attorney Angela Campbell asked.

"Because I was on call 24-7, 365, and I was a loyal servant to the state," Wheeler responded.

That, of course, would be the state that is trying to put him in jail for a program that was ill-conceived, badly drafted, and put in the charge of a guy who was hired to sell Iowa to the film industry, not run an enormous spending program with almost no guidance, oversight or staff.

While Mr. Wheeler didn't exactly cover himself with glory in administering this pinata for Hollywood, it's hard to see where it was corruption, rather than ineptitude. Even the prosecution has presented no evidence that Mr. Wheeler got any personal benefit. They want to put him in jail. Meanwhile, his immediate supervisor, the officials in other departments who green-lighted some of the worst abuses, the 143 legislators who passed a law with no definitions, limits, controls or funding, and the Governor who signed the bill and who had ultimate responsibility for its administration, skip away without consequence.

Closing arguments are set for today.

Related: Iowa's film credit program: what we know now

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

If you don't get a K-1, you still have to file on time

August 31, 2011

Many taxpayers with extended returns continue to wait in frustration for K-1s from partnerships or S corporations to include on their tax returns. Some of those K-1s will never arrive. That doesn't mean you just skip filing your 1040.

A California couple waiting on a K-1 for 2003 was filed in 2005. The IRS assessed late return penalties. The couple asked the Tax Court to abate the penalties because they didn't get their K-1. From the Tax Court (my emphasis, citations omitted):

Consequently, they claim they did not have the information needed to timely file their return for 2003. Petitioners further argue that because they were unable to file a timely return, they were also unable to timely pay the tax liability shown on their return.

The unavailability of information or records does not necessarily establish reasonable cause for failure to file a timely return. More specifically, a third party's failure to provide a necessary Schedule K-1 is not sufficient to establish reasonable cause. Petitioners were required to timely file a return based upon the best information available and to file thereafter an amended return if necessary.

The Moral? Even extended K-1s are supposed to be issued by September 15. If that K-1 doesn't show up by October, go ahead and file the best you can. You can amend the return later if the K-1 finally does arrive.

Cite: Whitney, T.C. Summ. Op. 2011-106.

Link       Bookmark: del.icio.usDiggreddit

The Swiss Army Knife of public policy vs. Swiss tax policy

August 31, 2011

20090617-2.jpgThe tax law is a mess because politicians see it as the Swiss Army Knife of public policy. Even if it is already too unwieldy to be of much use, they always have a new gadget to add. Apparently the Obama administration wants to add one more feature: a new tax credit for hiring. Tax Policy Blog reports:

A $5,000 tax credit for new hires combined with a five- percentage-point reduction in payroll taxes on the net increase wages paid by a business would stimulate 900,000 additional new jobs, according to his analysis.

Nonsense. You hire a new employee because you have work for the employee to do, not because the government is going to give you money. There might be some hiring that would occur as a result of a $5,000 tax credit, but it can't be much. The credit would function as a sort of back-door reduction in the minimum wage. If you can't afford the hire without the credit, the "job" can't last beyond the subsidy.

So instead of Swiss Army knives, let's ponder Switzerland:

Zug long was a poor farming region, but in 1947 its leaders began to trim tax rates in an effort to attract companies and the well-heeled. In Switzerland,, two-thirds of total taxes, including individual and corporate income taxes, are levied by the cantons, not the central government. The cantons also wield other powers that enable them compete for business, such as the authority to make residency and building permits easy to get.

Zug's tax policies didn't bear much fruit until the 1960s, but then its fortunes began to soar as businesses moved in, many establishing regional headquarters. Over the past decade, the number of companies with operations of some sort in the canton jumped to 30,000 from 19,000.

The number of jobs in Zug rose 20% in six years, driven by the economic boom and foreign companies' efforts to minimize their taxes. At a time when the unemployment rate in the European Union (to which Switzerland doesn't belong) is 9.4%, Zug's is 1.9%.

Now Zug has to cope with problems like too many Ferraris. No, we can't all be Zug. But they built their wealth with permanently low rates -- not with temporary tax code gimmicks. That trick is available to legislators everywhere -- even in Iowa.

Flickr photo of "The ultimate Swiss Army Knife" by redjar

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Let's exempt them from taxes in case some of them are poor

August 31, 2011

David Brunori at Tax.com notes that Maine's Governor proposes exempting all pension income from state income tax:

He says that he wants to prevent retirees from moving to Florida and Nevada. He also wants to alleviate the burden on senior citizens. But there is no evidence that anyone leaves Maine for Florida – and certainly not Nevada – for tax reasons. And some retirees earning a pension do not need the tax break. What LePage's proposal will do is narrow the tax base and force higher burdens on everyone else. I love old folks as much as the next guy. But I would not want to pay taxes for them.

As we've pointed out, being old is a poor proxy for being poor. Many old folks have paid-for houses and savings. There are certainly poor old people. They should be helped because they are poor. The self-sufficient elderly shouldn't get a break on the back of, say, struggling young families.

Tags: ..

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Sadly believable

August 31, 2011

Howard Gleckman at TaxVox predicts the endgame of the great deficit reduction committee will go. It's not pretty:

So the future will look something like this: The super committee will fail. The automatic spending cuts—half in defense and half in domestic spending—will be ordered but not begin until 2013. And sometime in late 2012 those automatic spending cuts will go the way of Gramm Rudman and all other past congressional attempts to force itself into fiscal prudence. The likely sum total of deficit reduction from the debt limit deal: $25 billion in 2012 spending cuts.

Deeply cynical, which is usually the way to bet in Washington.

UPDATE: More from Peter Suderman at Reason.com.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Taxpayer spreadsheet wins car deductions

August 30, 2011

Many taxpayers come to grief at IRS exams because they didn't bother keeping track of their business auto use they reported on their returns. A taxpayer turned the tables on the IRS yesterday in Tax Court.

The taxpayer worked for a Florida chain of Midas auto service franchises. The Tax Court explains where the auto use came in:

Her employment duties varied; as she describes her responsibilities, she did whatever the operations manager required. On any given day she routinely drove from one of the shops to another in order to attend managers' meetings, check inventory, check paperwork, enroll employees in the company's health insurance plan, and research customer complaints. She used her own automobile when it was necessary to drive between the shops.

She wasn't reimbursed by her employer, so she claimed her auto mileage as an unreimbursed employee business expense on Schedule A. She used a computer spreadsheet program to maintain her mileage records. The IRS disallowed her deductions, and she ended up in Tax Court. The judge sided with the taxpayer on this issue (my emphasis):

Petitioner maintained and submitted her mileage log showing the use of her automobile for business purposes during 2006. The log shows the beginning and ending location of each trip, the date of the trip, and the mileage for each trip. Petitioner's log does not show the total mileage for all use of the automobile during 2006, nor does it state the business purpose of the use of the automobile as required under section 1.274-5T(b)(6), Temporary Income Tax Regs., supra. Nonetheless, petitioner's mileage log substantially complies with the "adequate records" requirement of section 1.274-5T(b)(6), Temporary Income Tax Regs., supra, and to the extent her log is deficient, she has provided corroborative evidence sufficient to establish the required elements. Accordingly, petitioners are entitled to a $6,675 vehicle expense deduction attributable to business miles.

The Moral: an imperfect auto mileage log might be just good enough -- and it is sure better than nothing at all.

Cite: Diaz, T.C. Summ. Op. 2011-103

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

What's worse: federal prison or having your wife and girlfriend in the same house?

August 30, 2011

Few of us have the misfortune to taste either of the awful fates in the headline, but an Ohio real estate figure will now be able to compare and contrast. Thomas Parenteau of Hilliard, Ohio yesterday received a 22-year sentence for his role in a scheme to fraudulently obtain loans and evade taxes.

While at the peak of his career, Mr. Parenteau shared a house with his wife, his mistress, and his children by the mistress -- though to be sure, it was a 30,000 square-foot house. Both the wife and mistress were caught up in the case.

The Columbus Dispatch reports:

Central to the case was a 30,000-square-foot mansion at 4500 Dublin Rd. overlooking the Scioto River near Hilliard. Parenteau and his wife, Marsha, bought it for $1.8 million in 2003 through a trust and then, prosecutors said, used fraudulent documents to obtain $18 million in loans against the property.

The case also involved seven other luxury homes.

Parenteau’s trial last summer lasted 28 days. On the first day he fired his attorney and represented himself throughout the remainder of the proceeding. Two court-appointed lawyers acted as observers and advisers.

Maybe surviving with your girlfriend and your kids in the same house as your wife makes you feel you can do anything -- even be a lawyer. That doesn't seem to have worked out.

Related: And you thought taxes were complicated

TaxDood has more.

Tags: ....

Link  • TrackBacks (1)       Bookmark: del.icio.usDiggreddit

Ken Lay wins in Tax Court. But he's still dead.

August 30, 2011

Ken Lay got $10 million from Enron in a deal structured as a sale by him of an annuity contract to Enron. As the contract cost him $10 million, he reported no gain on his 1040 on the transaction.

The IRS said that he still owned the contract after getting the $10 million, so it was all taxable income. Yesterday the Tax Court decided for Mr. Lay -- well, technically, for his estate, as Mr. Lay died in 2006.

Former Enron advisor Paul Krugman has not commented on the decision.

More from The TaxProf and Kay Bell.

Cite: Lay, T.C. Memo. 2011-208

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Why IRS agents seldom transfer to the Foreign Service

August 30, 2011

Now the IRS has done it. They've made Canada mad.

The pursuit of enormous fines for paperwork violations for U.S. citizens abroad has gotten bad enough that it threatens a diplomatic row:

For over a month, NDP MP Don Davies has been receiving worried calls from constituents with U.S. citizenship who fear the American government will impose severe penalties on them -- up to 50 per cent of a major asset -- if they don't file their U.S. taxes by August 31, 2011.

"It's outrageous," said Davies. "Ninety-eight per cent of the people we've talked to are not trying to avoid paying U.S. taxes, but they have just had so little connection to the States so far that they didn't even know they had to report to the IRS."

Maybe it will take a firm stand by the Great White North against the IRS jaywalker shooters to restore a touch of sanity to the IRS offshore compliance pogrom.

Via Phil Hodgen.

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Iowa's film credit program: what we know now

August 29, 2011

We have completed the first two weeks of the trial of Former Iowa Film Office Director Tom Wheeler on felony misconduct in office charges. While there has been no evidence presented that Mr. Wheeler personally profited from the program, the trial has provided useful information on the way the program was enacted and run. A few things we've gotten out of the trial:

- The program as enacted was was poorly defined and outlined, leaving huge responsibility in the hands of the executive branch personnel running it.

- The legislature provided no additional staff and almost no funds to run the program, which had no theoretical or practical cap on the amount of taxpayer money that could be committed.

- The legislation had no provision that would keep the funds from being disbursed in the absence of a system of controls and review of the program.

- This left the program in the hands of a single mid-level state employee, Mr. Wheeler, whose background was in selling Iowa to filmmakers -- not in the administration of a multi-million dollar spending program.

- The man who originally hired Mr. Wheeler, before the tax credits were enacted, tesfied that Mr. Wheeler was unfit for the new responsibilities he was given under the program.

- Mr. Wheeler's supervisor at the Department of Economic Development required no regular oversight of the program until he found out that it was being used to buy luxury cars for film people -- well over a year after the program started.

- Other executive branch agencies, including the Department of Revenue, saw bits of the problem as the overmatched Film Office struggled to give away our money, but nobody ever felt compelled to sound the alarm.

- There's no evidence that any of the 143 legislators who voted for the program ever exercised their oversight responsibilities to see that the funds were being spent responsibly until the program was near collapse.

Whatever the outcome of the trial to Mr. Wheeler, the trial has documented an enormous failure on the part of Iowa's political leadership, both legislative and executive. Only Mr. Wheeler gets to undergo the nightmare of felony prosecution; the worst that happens to the rest of the bunch is new jobs, and that only for some of them.

What we've seen certainly doesn't make me trust them to spend more of my money in the name of Economic Development, or much of anything else.

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

Yes, the rich do pay higher taxes

August 29, 2011

Whenever you point out that the rich do pay significantly higher federal taxes than the poor, somebody shoots right back: what about payroll taxes?

Whenever you say that the tax system already leans heavily on the wealthy, someone says "Warren Buffett wants higher taxes for rich people, so you should, too."

The center-left Tax Policy Center has issued data that these folks should ponder. A sample:


Click chart to enlarge.

This data shows that even when you take the payroll taxes into account, the tax system is highly progressive. This data also usefully incorporates the effect of corporation income taxes into the equation, a factor Mr. Buffett famously ignores when pleading for higher taxes on other people -- and it's only on other people, as he already is free to give the government as much as he wishes.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Thanks, Irene! IRS extends offshore 'amnesty' deadline because of storm

August 29, 2011

The IRS has extended the 2011 Offshore Voluntary Compliance Initiative deadline to September 9 as a result of Hurricane Irene. This gives anybody who has been trying to get a last minute submission in a little more time.

Linda Beale reports the news with the appalling headline, "Hurricane Irene Postpones Deadline for Offshore Tax Evaders to File Voluntary Disclosure" While tax evaders stand to do well by the program, the only people left who still think that everyone who hasn't fully complied with the Kafkaesque offshore filing requirements are crooks seem to be Ms. Beale and some of the IRS agents running the program. In real life the IRS is clobbering expatriates who innocently violated reporting rules they had never heard of and immigrants who didn't know how much the IRS wants to know about their foreign accounts.

More coverage:

TaxGrrrl
Russ Fox
Taxes in the Back
Jack Townsend

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Right here in River City

August 26, 2011

My nod to musical theater, and the film scandal, at Going Concern.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

The jaywalker slayers would be more popular if they had a Twitter account

August 26, 2011

When billionaire Warren Buffet again climbed on his high horse to complain that other rich people should pay more taxes, fellow billionaire Harvey Golub was having none of it:

Governments have an obligation to spend our tax money on programs that work. They fail at this fundamental task. Do we really need dozens of retraining programs with no measure of performance or results? Do we really need to spend money on solar panels, windmills and battery-operated cars when we have ample energy supplies in this country? Do we really need all the regulations that put an estimated $2 trillion burden on our economy by raising the price of things we buy? Do we really need subsidies for domestic sugar farmers and ethanol producers?

Len Burman of the Tax Policy Center says that there is something to Mr. Golub's complaint, but that he wouldn't be so grumpy if the government just explained itself better -- maybe with Facebook or something:

More importantly, the government does a terrible job explaining what it does well. I think in large part it’s because agencies are extremely risk averse...

This social media stuff is way beyond my expertise, but someone in the Obama Administration should read the terrific book, Groundswell, by Charlene Li and Josh Bernoff (disclosure: Bernoff is my cousin). The book explains how companies have successfully used social media to engage with their customers and help shape the way the public sees their products. More than ever, the government needs to do that.

There's only so much you can do with 140 characters. Even a Twitter Jedi master might have some trouble putting a positive spin on the IRS conduct of its foreign account "amnesty," which seems expressly designed to impoverish Americans abroad and Green Card holders for the crime of not knowing obscure Treasury regulations. After reading a story in the Indian press about how the IRS says it is being very reasonable and understanding, Phil Hodgen explained how it really works:

If I had been drinking chocolate milk while I was reading that I would have snorted it out of my nose with derisive laughter. That’s not the IRS I know and love. The IRS I deal with throws $100,000 penalties at people with $4,000 of unreported income (thus maybe $1,000 of tax) over eight years.

...

The IRS track record in the 2009 Voluntary Disclosure Program is abysmal. There is no discretion given for judgment calls such described above. This is a statement by an IRS official who is lives on a different planet from the rest of us. Innocent and ordinary taxpayers were loaded on the tumbrel and trundled off to the guillotine with alacrity and enthusiasm by the IRS.

This is lazy reporting by the Times of India (c’mon, journalists! Ask the hard questions!) and Orwellian doubletalk (at best) by the person who made these statements.

Of course, the IRS official could also think that a “smaller” penalty is defined at $140,000 against a $1,000 tax liability and is a really “good deal for the taxpayer”, as one Revenue Agent (playing Good Cop/Bad Cop) has snarled at me.

And it's not just computer techs from India. It's Americans abroad, too (via Going Concern):

A Lac du Bonnet woman is worried she could face huge fines for failing to file American tax returns, but the U.S. Internal Revenue Service has some soothing words for her and thousands of other Canadians in the same pickle.

Ohio-born Julie Veilleux spent the first eight years of her life in the United States but has lived in Canada for nearly 40 years. She became a Canadian citizen in 1995 and was told by the citizenship judge she was no longer an American.

But Veilleux is among thousands of Canadians who could get caught up in a U.S. tax dragnet called the Offshore Voluntary Disclosure Initiative, or OVDI. It's an amnesty program that promises reduced fines and penalties for Americans living abroad who catch up on unfiled tax returns. But it still threatens penalties of $10,000 or more for every bank account, RRSP or other savings account not declared from 2003 to 2010.

Enormous fines, soothing words. If the soothing words were on Twitter or Facebook, everyone would realize what a great job the IRS is doing.

Related: Shooting jaywalkers so we can slap the real criminals on the wrist

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Sadder but (slightly) wiser

August 26, 2011

The Iowa City Press-Citizen was an early pusher of tax credits for the film industry. Millions of dollars and a bunch of plea deals later, they have second thoughts:

But the film scandal did draw some needed attention to a fairly non-sexy subject: Iowa's tax credit system. And the film scandal turned out to be just the tip of the iceberg for identifying credits in which the state not only forgives all taxes owed but actually writes out a check to cover additional expenses. Our state leaders -- along with newspaper editorial boards -- need to continue to realize that such deals are usually too good to be true.

Well, I tried to tell them, but a tax blogger just doesn't have the gravitas of a newspaper editorial board or a bunch of state legislators.

So what have they learned?

The scandal has been a painful lesson for everyone who agreed with the original intent of the legislation -- including us. The film tax credit deserved to have proper oversight -- not to be left largely in the hands of a single state employee who originally was hired for marketing the state and not for overseeing contracts and calculating tax liability. The program also deserved to have state officials higher up the political food chain making sure that someone was watching the watchers.

So, close, Press-Citizen editorial board. It's not just the program's oversight was flawed. The real flaw was the very idea that the state should take money from the rest of us and give it to Hollywood. It's worth noting that the Press-Citizen had lots of company among Iowa media in its wide-eyed gullibility. So they're learning. Too bad the tuition is so expensive.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

What do you mean, I can't document my expenses with 1099s that I never filed?

August 26, 2011

A man who hired contract laborers in his business got audited by the IRS. The IRS asked for some documentation for his labor expense. The Tax Court takes up the story:

On Schedule C, Profit or Loss From Business, of their 2005 Federal income tax return, petitioners reported a contract labor expense of $177,925. During the audit of their return petitioners provided 64 Forms 1099-MISC, Miscellaneous Income, showing the names and Social Security numbers of the daily workers whose services Mr. Weatherly engaged and the amounts paid to each worker. Petitioners did not file any Forms 1099-MISC as payers with the Internal Revenue Service (IRS) for 2005.

So the taxpayer deducts $177,000 on his 1040 schedule C and documents it with 1099s that were never filed. That works, right? Well, no:

Petitioners have not provided contemporaneous books and records to substantiate their contract labor expense for 2005. Further, Mr. Weatherly failed to testify at trial to the recordkeeping practices of his business. Petitioners merely produced 64 Forms 1099-MISC prepared for the audit without any supporting documentation. These Forms 1099-MISC were not filed with the IRS. Petitioners were able to produce only six valid Forms 4669 for six daily workers, for which respondent conceded a deduction of $25,115. As to the remainder of their claimed contract labor expense, petitioners have failed to substantiate that such an amount was paid.

The Moral? An unfiled 1099 just isn't that persuasive.

Decision for IRS.

Cite: Weatherly, T.C. Memo 2011-206

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Math is still hard

August 26, 2011

"TIGTA: IRS Made Math Errors in 17% of its Taxpayer Math Error Adjustments"

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Former Economic Director: the Benz tipped us off to the looting

August 25, 2011

While his underling at the Iowa Film Office was giving away millions of taxpayer dollars to fund pretend expenses, the Iowa Director of Economic Development was oblivious. Then Mike Tramontina heard about the cars. Rod Boshart reports at EasternIowaGovernment.com:

The former head of the state Department of Economic Development said Wednesday he was not aware of brewing problems in the agency’s film office until he got a tip in August 2009 about state tax credits that were approved for purchases of luxury vehicles by filmmakers that appeared to be inappropriate.

Amazing. Mr. Tramontina was the supervisor of Iowa Film Office Director Tom Wheeler, who is on trial for felony misconduct charges for his role in running the film tax credit giveaway. With no employees, Mr. Wheeler was handing out transferable tax credit certificates worth millions of dollars on the flimsiest of documentation, and it didn't occur his boss to make sure the money was being given out prudently until he found out that taxpayers had bought a Benz for a producer.

With all the horrendous waste and abuse that has been documented in the film program, some people still seem to think it's a good idea:

Rebecca "Becky" Gruening, film commission director for the Greater Des Moines Convention and Visitors Bureau, praised Wheeler as honest, hardworking and fair in his business dealings and helped Iowa’s budding film industry grow to an $82 million economic benefit in central Iowa before the September 2009 scandal suspended the tax credit program and caused a negative $50 million fallout.

$82 million benefit? What a joke. That number must value the benefits of the program using the same math that convicted filmmaker Wendy Runge used to value the rental of a broom for $225.

Related: Let them eat canapes

Full Tax Update Film Credit Coverage.

Tags: ........

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

The rich guy still won't be picking up the tab, revisited

August 25, 2011

Bruce Bartlett, the Denethor of the Right, has concluded that against the power that has arisen in the Welfare State, there is no victory -- so the rich should pay more taxes.

William McBride explains why "the rich" won't be picking up the tab at the Tax Policy Blog:

As the following graph shows, in 2007 those households in the highest income quintile (the top 20 percent) had an effective tax rate of a little less than 15 percent. This has changed very little since 1986 or anytime in the 1980s.

Contrast that with the lower income quintiles, which all pay dramatically less tax now than they did in the 1980s. The trend is most pronounced among those in lowest income quintile, which had an effective rate of about zero up until that magical year 1986, and thereafter a more and more negative rate. In 2007, those in the lowest income quintile not only paid no tax, they got paid at the rate of 6.8 percent of their income! Starting in 2002, the effective rate for the second lowest income quintile goes negative as well. This means that the bottom 40 percent of households are now getting paid through the income tax code.


Click image to enlarge

Note where the 0% line is.

As Mr. McBride points out, the U.S. income tax system is more progressive than in the rest of the developed world. They realize that clobbering "the rich" hurts more than it helps. The welfare states of Europe rely on broad-based taxes, like Value-added Taxes, to pay their welfare bills. If the U.S. goes Euro-style, expect a VAT, or at least a return of a more broad-based income tax.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Canada declines to shoot jaywalkers for IRS

August 25, 2011

Russ Fox reports that Canadian revenue authorities won't help US authorites collect the horrendous penalties they are collecting from U.S. citizens with respect to foreign financial account reporting. That should be a relief to at least one Canadian with a U.S. parent.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Anarchy in the US tax system at Forbes

August 24, 2011

I have a guest post in Peter Reilly's space at Forbes on preparer regulation. A taste:

Anybody expecting the new rules to run unscrupulous or inept preparers out of the business can only look at the already-regulated tax sector to learn otherwise.

Thanks to Mr. Reilly for the guest-posting opportunity.

Tags: ...

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Iowa Department of Revenue takes the stand in film trial

August 24, 2011

The Iowa Department of Revenue made its appearance at the trial of former Iowa Film Office Director Tom Wheeler yesterday, in the form of its tax policy guru, Jim McNulty. The testimony shows that there were clues to the ongoing Film Office disaster available in other parts of the state government that weren't picked up.

From Lee Rood's Des Moines Register piece:

Jim McNulty exchanged numerous e-mails with Wheeler in 2007 and 2008, giving him advice on a wide range of questions regarding what was acceptable under the new program. McNulty said he based his opinions on what he knew about existing tax law and from consulting others.

...

For example, McNulty confirmed he sent an email to Wheeler saying that films that were registered with the state by July 2007 were eligible for tax credits, contradicting others in state government who contended after problems erupted that films did not qualify unless they had signed contracts.

He also told Wheeler in emails that services-in-kind, or services provided in which no cash changed hands, were eligible to qualify for tax credits if certain criteria were met. That’s because existing film legislation didn't specify cash-only investments.

"In-kind" contributions -- the barter of services -- are normally innocuous in the tax law. The provider of the services is supposed to pick up income for the value of services received, but is only allowed to deduct the actual cost of services provided. That keeps people from inflating their value. But when tax credits are involved, the calculus changes. Tax credits were being allowed up to 50% of film costs (though the Attorney General's office says that no more than 25% should have been allowed). You don't mind paying 35% tax on phantom income -- assuming you actually take the trouble to report the "in-kind" income -- if you are able to sell a 50% tax credit. And so the abuses kicked in.

The Kent Feeds example, where an Iowa company refused to play along with filmmakers, shows how this works. The feed company was asked to sponsor a film project involving horses, including the provision of feed; in return, the company would be named as a sponsor on promotional materials and in the credits trailer at the end of the programs. From the State Auditor Report on the program:

According to a Kent Feeds representative we spoke with, Mr. Witter [a film credit middleman] initially approached the company to determine if they were interested in purchasing tax credit certificates. When Kent Feeds declined, they were asked if they would be interested in sponsoring a project for Changing Horses. Kent Feeds agreed and a contract was prepared and presented to the company which included a value of $1,000,000.00 for the sponsorship.

According to the Kent Feeds representative, they declined to sign the contract for the first project which included the $1,000,000.00 value. The representative stated he told Mr. Witter the amount was grossly overvalued and they would not sign the contract. After the value was removed, Kent Feeds signed a contract which did not include a value for the sponsorship.

The State Auditor report said the film company claimed credits based on the $1 million value anyway.

The Des Moines Register report on yesterday's testimony also says:

McNulty was one of several people who tried to help Wheeler and other officials at the Iowa Department of Economic Development define what was acceptable as the program got up and rolling.

This shows that clues about the fiasco in the film office were available around state government, but nobody put them together until millions of dollars of tax credits based on phony expenditures had already been issued and sold to third parties. While that doesn't speak well of Mr. Wheeler's administration of the program, it helps the case that he is on trial as a sacrificial goat for his supervisors, including the then-Governor, who let the program spin out of control. Of course they face no charges. Nor do the legislators who passed the program with "few definitions" in 2007.

Tags: ........

Link       Bookmark: del.icio.usDiggreddit

Iowa Priorities

August 24, 2011

When Iowa really cares, it can move quickly.


- Time between enactment of Film Tax Credit Program and its suspension after revelations of massive corruption: 17 months

- Time between end of 2010 tax year and passage of final legislation for computing 2010 Iowa income taxes: 6 months.

- Time from introduction of new traveling trophy for the winner of the annual Iowa - Iowa State football game to its withdrawal in the wake of fan criticism: four days.

It's all about what's really important.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Five cars for Hollywood!

August 23, 2011

We knew about the Benz and the Range Rover. We didn't know that Iowa taxpayers had bought four more vehicles for the film industry to take home as part of the Iowa Film Tax Credit program. We know now. From Rod Boshart at the Sioux City Journal:

Overall, six vehicles -- the two luxury cars, a pickup truck and horse trailer, and three other vehicles - were cited by prosecutors during the second week of Wheeler's trial on charges of felony misconduct in office, first-degree fraudulent practices and conspiracy.

However, under cross examination by defense attorney Angela Campbell, Lintz conceded that the vehicle purchases in question were within the scope of the statute that lawmakers approved in 2007 and the subsequent rules that were adopted to implement the program.

Former Film Office director Tom Wheeler is on trial on felony charges in connection with his management of the program, and several other figures in the film industry have pleaded guilty to defrauding the state. As bad as any crimes are, though, the real outrage is what was perfectly legal under the program.

Mr. Wheeler's defense is spreading the blame for the mismanagement around state government like a rogue honey wagon spreads hog manure. If he makes it look like he had an impossible job, it will be harder for a jury to convict him for misconduct. From Lee Rood at The Des Moines Register:

During the trial Monday, [defense attorney Angela] Campbell lugged three large boxes from behind the defense table and asked Lintz if he was aware they contained receipts for just one movie, South Dakota.

“It would be impossible for one person to check all the receipts for all theT films that came into the film office, wouldn’t it?” Campbell asked Lintz.

Lintz said "it could be done depending on the time frame." Later, Lintz testified that to do all Wheeler was asked to do "would be quite excessive."

The Wheeler honey wagon may spray some nutrient-rich stuff at the Department of Revenue today, according to the Register:

The defense’s case is expected to begin today with testimony from Jim McNulty, an Iowa Department of Revenue official who gave Wheeler clearance to approve several expenditures used to claim millions in state tax credits that prosecutors have called into question.

This could be interesting.

Related: HAROLD HILL WANTS US TO FINANCE HIS FILM

Complete Tax Update film tax credit coverage.

Flickr image courtesy carlfbagge under Creative Commons license.

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Where are the rich folk headed?

August 23, 2011

To North Dakota, it seems.


Click image to enlarge

Iowa is #14 in the percentage increase of high income filers in the ten years ending in 2009, according to the Tax Policy Blog.

Link       Bookmark: del.icio.usDiggreddit

How's the corn?

August 23, 2011

Paul Neiffer of Farm CPA Today is touring the Midwest to check out how the crops are doing. You can follow him on his Twitter feed.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Des Moines sewers yield archaeological gold!

August 22, 2011

From Radio Iowa:

The state archaeologist has confirmed that a site found in Des Moines contains artifacts that are several thousand years old. Archaeologist, John Doershuk, says the village was found at the site of a sewer project in Des Moines, and they have been able to confirm its age at seven-thousand years.

The site is one of the oldest instances of human habitation in the state. Two sets of human remains have been discovered at the site. Reports that they are still awaiting a policy letter from the Iowa Department of Revenue could not be confirmed.

Link       Bookmark: del.icio.usDiggreddit

'Look. The police in my town all carry guns. But they don’t shoot out the tires of your car if your parking meter expires.'

August 22, 2011

Phil Hodgen notes the story of a Canadian citizen who has never been to the U.S., but who is ensnared in the FBAR debacle by an American parent. The Canadian ponders his options:

Here is my dilemma: I do not want to be a US citizen. I do not feel comfortable navigating the US tax system--which I do not understand--as my own financial situation gets more complicated and as my parents age and (theoretically) leave me inheritances. I am still a student, working on my PhD, and don't have the money/will probably never have the money to hire someone to catch me up on FBAR forms and 1040s.

It seems to be that I have two options: 1) catch up on taxes and then formally renounce citizenship & 2) simply disappear.

Don't you know, son, that the IRS has to impoverish you so it can slap international tax cheats on the wrist?

Of course, Phil, the proper analogy is "shooting jaywalkers."

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Not all the rich guys think the government should get more of your money

August 22, 2011

Harvey Golub in the Wall Street Journal (Via The TaxProf):

Before you "ask" for more tax money from me and others, raise the $2.2 trillion you already collect each year more fairly and spend it more wisely. Then you'll need less of my money.

Spend less, spend smarter, then we'll talk taxes -- sounds about right. But Daniel Shaviro has a different view: while taxing the risk is futile and useless in solving the budget crisis, we should do it anyway:

. With an aging population and retirement programs that serve important social purposes (and also are baked in to people's behavior and expectations), raising taxes just at the top will not be sufficient. But raising them at the top as part of the short-term budgetary response (if anything happens from the Gang of Twelve deliberations) would certainly be a start.

A pointless start, but a start nonetheless!

Related: Look at me! I want the government to take your money! Aren't I great?

More from Peter Pappas.

Tags: .....

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Non-conventional home financing leads to tax trouble in Minnetonka

August 22, 2011

A Minnesota developer faces federal charges of looting his business to finance this island home on Lake Minnetonka. From StarTribune.com:

According to the indictment, Wirth and the others funneled more than $2 million from Wirth's companies to buy the land and build the mansion, and didn't report the money as income on either personal or business tax returns.

The abandoned villa, with its tile roof and arching doorways, sits on a private island connected to the mainland by a bridge in St. Albans Bay.

Russ Fox has more. Remember, if you can't even get FHA financing, maybe you should get less house.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Congratulations, Newlyweds!

August 22, 2011

But now that the honeymoon is over, taxes beckon. Kay Bell offers 6 tax tips for Kim Kardashian and other newlyweds.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Witness: we got taxpayer money for saying we'll spend money someday

August 19, 2011

The trial of Iowa Film Director Tom Wheeler yesterday revealed a new and creative way taxpayers got swindled by the Iowa Film Tax Credit program: pretend pay for film employees.

The witness was filmmaker Bruce Elgin, an early booster of the Film Credit program, who is testifying under the terms of a plea bargain. He said that Mr. Wheeler encouraged him to claim tax credits based on "deferred" compensation that would only be paid if the film were sold, and was ultimately never paid. From The Des Moines Register:

For example, one invoice for an actor's pay that prosecutors showed the jury on Thursday totaled $11,100, of which $8,800 was deferred. Under the incentive program, half of the $11,100 ultimately went to Elgin's company.

"Iowa Film Production Services made a pretty good profit on a movie that never sold?" prosecutor Thomas H. Miller asked Elgin.

"Yes, sir," Elgin said.

So Mr. Elgin was able to sell film credits worth $5,550 based on actual wages paid of $2,300 -- a 241% tax credit, rather than the touted 50% credit.

Elgin, who submitted invoices worth roughly two and a half times what it cost to make his movies, received $5 in tax credits for every $2 he spent on his films.

Sweet deal, except for the taxpayers. The trial continues today.

Related: Let them Eat Canapes

Complete Tax Update film credit coverage

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

Look at me! I want the government to take your money! Aren't I great?

August 19, 2011

Warren Buffett and Henry Bloch get all moralistic when they call for higher taxes on "the rich." But they're just striking a pose. The Tax Policy Blog shows how little shaking down high-earners will do to solve our federal fiscal disaster:

Mr. Buffett specifically called to raise tax rates on Americans making more than $1 million and proposed an additional increase on taxpayers whose income exceeds $10 million. Suppose Mr. Buffett got his wish and loopholes and deductions were eliminated, making it possible to tax the "super-rich" (those earning $1M - $10M per year) at an effective rate of 50%. The following table shows the effect that such a historic hike on effective rates would have on the deficit and debt:


Click to enlarge

In addition, Mr. Buffett wanted those making more than $10 million per year to pay even more. The table below exhibits the effect of imposing a 100% effective rate on these individuals:


Click to enlarge

So taking half of the yearly income from every person making between one and ten million dollars would only decrease the nation's debt by 1%. Even taking every last penny from every individual making more than $10 million per year would only reduce the nation's deficit by 12 percent and the debt by 2 percent. There's simply not enough wealth in the community of the rich to erase this country's problems by waving some magic tax wand.

So The Sage of Omaha and the man who built an empire on tax complexity want credit for sacrificing others on the altar of fiscal responsibility. Yet the problem isn't that we let people who make money keep some of it. The problem is that we are spending too much. Rather than suggesting a way to spend less or pay for what we are spending, they preen their generosity with other people's money. And yet the U.S. already relies very heavily on "the rich" for its taxes. If spending doesn't go down, the rich aren't going to be able to foot the bill.

Politicians offer goodies and say someone else will pay for it. TSOO and Mr. Bloch are doing the same thing. If they are going to act like politicians, they deserve no more credit for what they say than other politicians.

Related: Warren Buffett, Tax Poseur

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Underpayment, overpayment IRS rates fall for Fourth Quarter 2011

August 19, 2011

The IRS has released (Rev. Rul. 2011-18) the updated interest rates for amounts owed by and to the IRS for the three months begining October 1, 2011:


* three (3) percent for overpayments [three (3) percent in the case of a corporation];

* three (3) percent for underpayments;

* five (5) percent for large corporate underpayments; and

* one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Economic development incentives: why not "disarm"?

August 19, 2011

Brian Gongol accurately describes the state of play in corporate wellfare in the form of state "economic development incentives":

Unilateral disarmament in the economic-development battlefield isn't likely to happen, since nobody wants to be the politician or public official blamed for failing to "bring jobs" to a community. But the fact of the matter is that these incentives tax some companies and people to subsidize their own competitors. It's a perverse structure that really must end.

That's exactly so. And the politicians like it that way. They get to issue a press release, cut a ribbon, and claim credit for the jobs they "created" by taking your money and giving it to somebody else.

Yet unilateral disarmement is the right answer for corpore welfare. I'll vote for any politician who declares war on economic development "incentives" with this battle cry:

Businesses aren't stupid. Taking money from your taxpayers to troll for new businesses is like taking your wife's purse into a bar to buy drinks for the girls. The girls know you'll raid their purses when you get the chance, and any pickups you do get aren't exactly going to be prizes.

Related: The Tax Update's Quick and Dirty Iowa Tax Reform Plan

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Me and Megan

August 19, 2011

I've been invited back to Going Concern, a blog that obsesses about the CPA industry. My return post address Megan McArdle's question: why isn't everyone incorporated?

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Witness: Wheeler knew about the Range Rover

August 18, 2011

The Iowa Film Tax Credit program collapsed upon revelations that taxpayer money was used to buy a Benz and a Range Rover for film people. Yesterday a witness in the felony misconduct trial of former Iowa Film Office director Tom Wheeler said he knew about the vehicles. From the Des Moines Register:

Steve Faust of Urbandale, who worked on several Iowa movies after the lucrative incentive was created, testified that he told Wheeler that director Bruce Isacson planned to ship a luxury Land Rover back to California once the movie "South Dakota" wrapped.

"I went and said, 'Tom, do I need to talk to you or someone above you?' " he said.

Wheeler said he would take care of the problem, and asked that Faust not take it higher or he could get fired, Faust said.

There seems to be no evidence that Mr. Wheeler received any personal benefit from the program. The prosecution will need to convince the jury that the gross misadministration of the program should constitute a felony on Mr. Wheeler's part. The defense will cast Mr. Wheeler as a scapegoat for an ill-conceived program, and is likely try to deflect responsibility to his supervisors and the Department of Revenue. The fun is just beginning.

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

Accountant not allowed to deduct his research carrel

August 18, 2011

As long as I have been in public accounting, the men's room has also been called the "research library." It's less so in this age of electronic research, but that didn't keep a Florida accountant from claiming a home office deduction for a bathroom. Unfortunately, he failed to restrict library access. From the Tax Court:

Petitioner used one of the bedrooms of his residence exclusively as his office for his accounting business. Petitioner argued that he also used the hallway and the bathroom adjacent to this bedroom exclusively for his accounting business. Petitioner testified, however, that his children and other personal guests occasionally used the bathroom. Accordingly, the hallway and the bathroom were not used exclusively for business purposes.

But what if the kids are employees? Oh, he tried that:

Petitioner argues that both his daughters were paid wages for administrative work performed for his accounting business in 2007. However, neither daughter was issued a paycheck, Form 1099-MISC, or Form W-2. Further, neither had tax withheld. Petitioner testified that he paid his daughters for their work by paying their credit card bills but has not provided any evidence to substantiate amounts paid. Accordingly, we sustain respondent's determinations with respect to the wages paid to petitioner's daughters.

The Moral? If they don't get a paycheck or an invoice, keep them out of that executive bathroom.

Cite: Bulas, T.C. Memo. 2011-201

Via The TaxProf

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Flight of the jaywalkers

August 18, 2011

The dedication of the IRS to shooting jaywalkers in their foreign account compliance programs is yielding impressive results. From Andrew Mitchel:

The number of Published Expatriates for the second quarter of 2011 was 519. This is the second highest number of quarterly Published Expatriates during the past seven years. The only higher quarter during this time was the second quarter of 2010, with 560 Published Expatriates.

If current trends continue, the number of Published Expatriates for 2011 will exceed 2010 by 30% or more. The following graph shows the quarterly average number of Published Expatriates since 2004.

It's a tribute to the sensitive and judicious IRS handling of trivial violations of the foreign account reporting rules.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

IRS releases Applicable Federal Rates (AFR) for September 2011

August 18, 2011

The IRS has issued (Rev. Rul. 2011-20) the minimum required interest rates for loans made in September 2011:

-Short Term (demand loans and loans with terms of up to 3 years): 0.26%

-Mid-Term (loans from 3-9 years): 1.63%

-Long-Term (over 9 years): 3.57%

The Long-term tax-exempt rate for Section 382 ownership changes in September 2011 is 3.86%.

Tags: ..

Link  • Applicable Federal Rates       Bookmark: del.icio.usDiggreddit

Warren Buffett, Tax Poseur

August 17, 2011

There have been many good takedowns of The Sage of Omaha's recent preening for higher taxes in the New York Times (here, here, and here, for starters). Most make the useful point that nothing is stopping him from giving more money to the government without putting it on his tax return first. His will, which gives his millions to the Bill and Melinda Gates Foundation rather than the government, belies his preening.

Still, it's worth pointing out that his premise -- that he pays less taxes than his secretaries -- is wrong. His 1040 may show a 17% effective rate. That's because he takes his income as capital gains from selling corporation stock. Those corporations pay taxes. TSOO is selling retained earnings that have already been taxed at a 35% rate, the second-highest corporate rate in the developed world. He is also being taxed on "income" resulting from inflation -- in other words, on imaginary income. Between the tax on inflation and the hidden tax on income paid at the corporate level, his tax is probably at least twice the 17% rate.

Warren already has his pile. An increase in the top marginal rate will make it that much harder for entrepreneurs to build their businesses; they will have to turn over more of their income to the IRS, rather than opening new locations and funding new products. TSOO wants to pull up the ladder now that he's on top.

Related:

Any Guesses on How President Obama Feels About Warren Buffett’s Op-Ed?

The Real Reason Warren Buffett's Taxes Are Low

Tags: ......

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Kansas City tax advisor runs out of tax miracles at appeals court

August 17, 2011

There are no tax miracles.

Sure, lots of folks say there are, if you just hire them, or buy their book. There are always clients for those who promise a painless end to tax woes, and there's always an audience that wants to hear that their old tax pros are just incompetents or wimps who are afraid to take on The Man.

A case decided by the Eighth Circuit Court of Appeals holds a lesson for these folks. The Eighth Circuit upheld an injunction against a host of tax plans promoted by former Coopers & Lybrand and Grant Thornton attorney A. Blair Stover. These included:

- A setup using a "parallel" C corporation with a November year end to suck all of the income out of an S corporation as "management fees" in December, providing an 11-month deferral of the tax on the income.

- A similar deal where the substance-free management company was owned by an ESOP, thus sheltering the income until it was withdrawn by the owner.

- Still another deal where the "management" C corporation was owned by a Roth IRA.

While these may have seemed attractive at the time, they worked out badly for the clients. From the Appeals Court opinion:

The IRS conducted a lengthy and costly investigation into Stover's schemes. The district court found that agent Rhonda Kimball spent over three thousand hours (more than one year's normal work) unraveling transactions for just two of Stover's clients. It also found that even the most conservative estimate of the tax loss to the government caused by Stover's schemes was $100 million, and potentially as high as $800 million. Agent Janice Mallon testified that a "reasonable estimation" of the government's tax loss was $300 million. Apart from those costs, most of Stover's clients had to pay other professionals to "undo" the structures Stover promoted, organized, and sold. Many had to pay penalties to the government.

Until things blew up, these taxpayers probably sneered at their wimpy old tax advisors, who weren't willing to be really creative like Mr. Stover. In the end they had to pay extra to the IRS and to those milquetoast tax people who color inside the lines. One of these cases showed up in the Tax Court just last month. It's something to keep in mind when you see one of those "pennies on the dollar" TV ads.

Cite: Stover, Case No. 08-6018-CV-SJ-ODS, CA-8, 8/16/2011

Related:

Kansas City attorney gets unwanted review of his tax work
FOOL'S GOLD AND CHICKEN SHELTER

Tags: ..

Link  • Tax Shelter News  • TrackBacks (1)       Bookmark: del.icio.usDiggreddit

IRS sues Grimes company over payroll taxes

August 17, 2011

The IRS really hates it when employers get behind on their payroll taxes. A Grimes construction company is learning all about this. From a Department of Justice press release issued yesterday:

The United States has filed a lawsuit in an Iowa federal court against a Des Moines, Iowa, metro area company, Advanced Underground Construction LLC and its principal, William David Ward II, the Justice Department announced today. The civil injunction suit asks the court to stop the defendants' alleged repeated failures to pay to the U.S. employment taxes that are withheld from employees' wages.

The government suit says that the company owes the government more than $370,000.

Penalties build up in a hurry when you fail to pay employment taxes, and liability for unpaid withholding taxes follows "responsible persons" if the LLC or corporation that was supposed to pay the taxes fails. Using withheld taxes to pay your vendors is ruinously expensive financing.

Link: Copy of complaint.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Got losses?

August 17, 2011

My new IowaBiz.com post talks about dealing with your stock market misfortunes. IowaBiz.com is the Des Moines Business Record's group blog for entrepreneurs, with new good stuff daily from Central Iowa gurus in topics from marketing to Internet law.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

The kinder, gentler side of IRS

August 16, 2011

The IRS doesn't think your little brain injury should excuse late filing of your tax return. The Tax Court sets the stage:

Late in 1998 he abandoned the practice of medicine and became a full-time day trader. Four or five months later, petitioner wife suffered a severe head injury that resulted in a cerebral hemorrhage and coma. Following brain surgery, petitioner wife became paralyzed on the left side of her body, and she had a limited memory.

At that time petitioners had two minor children and two children in college, and petitioner ceased day trading to care for his wife and children full time. It took more than 2 years for petitioner wife to be able to get around and manage her own care independently. Initially, petitioner's wife was unable to perform most of the basic functions of human existence, and petitioner taught her to walk, eat, dress, etc.

During 2001 petitioner began working as an appeals medical director for a health insurance company. Shortly after that, his wife developed a new condition known as "normal pressure hydrocephalus". This condition caused additional problems for petitioner and his wife, including her lack of balance, worsening short-term memory, and incontinence, among other things. She required additional brain surgery during July 2001 to implant a shunt in her cranial ventricle to allow drainage. During the following 2 years petitioner's income was insufficient to cover his family's living expenses, and he amassed approximately $150,000 in debt.

The taxpayers fell behind on their 2001 and 2002 returns, not filing until February 2006. The IRS thought there was no good excuse, and the taxpayers went to Tax Court:

The record reflects that after petitioner wife's accident he was consumed by his constant attention to her needs during the period under consideration; by his unsuccessful attempt to earn enough money to pay the bills; by his obligation to care for his family; and by the maintaining of his household. When the returns were due petitioner slept little and had no time for any other activity. Under these circumstances, petitioner attempted to maintain sufficient records but was nevertheless unable to file the tax returns within the prescribed time. Additionally, during that time petitioners' returns were being audited, and there were substantial differences between the parties concerning the application of credits and overpayments from prior years. The failure to file was not due to petitioners' intentional failure or reckless indifference.

Decision for taxpayers.

Remember that Doug Shulman's IRS is all about fairness. We'll see if the IRS asks Congress to close this new Brain Injury Loophole.

Cite: O'Bryant, T.C. Summ. Op. 2011-101.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Those who don't do, teach tax?

August 16, 2011

Tax Analysts reports the strange story of a CPA who was disbarred by the IRS Office of Professional Responsibility for wilfully failing to pay tax for nine years. What's strange about that? From the story:

In a complaint, the OPR alleged that CPA Edgar H. Gee Jr. had not paid any federal taxes owed from tax years 1997 through 2005. The OPR said Gee had engaged in disreputable conduct by willfully evading his federal tax obligations. The total unpaid taxes claimed by the IRS were nearly $340,000, including interest and penalties.

According to online biographies from several state CPA associations for which he has taught continuing education courses, Gee had over 35 years of professional experience in the tax arena and once served as president of a local state CPA chapter. His particular area of knowledge seems to be independent contractor issues, and he has written a worker classification guide for a major tax publisher.

A puzzling case. Mr. Gee had to know what happens when you don't pay taxes. An "instructor biography" at the Maryland CPA society says:

Edgar H. Gee Jr., CPA, DABFA Individual Practitioner/Knoxville, Tennessee Edgar Gee is a local firm practitioner with over 30 years of professional experience. He works closely with small business in areas of auditing, tax planning, IRS representation and litigation support services and business valuations. A noted author, Mr. Gee has published articles in the Tax Advisor relating to the largest independent contractor case against the IRS in U.S. history. He testified before the U.S. House of Representatives Subcommittee on the Oversight of IRS Activities in 1996. He is co-author of two AICPA courses, "AICPA's Eldercare: Medical & Psychosocial Issues of Aging" and "AICPA's Eldercare: Financial Issues of Aging" as well as co-author of PPC's Guide to Worker Classification . Winner of the Max Block Award by NYSSCPAs for Distinguished Article of the Year 2000, "Independent Contractor or Employee: How the Process Works Today." Mr. Gee speaks nationally to many professional organizations. He was past president of the Knoxville Chapter of the Tennessee Society of Certified Public Accountants.

It took nine years of non-filing before he got bounced. A commenter last week said that the IRS can "pull the ticket of a CPA EA or lawyer administratively." Not very quickly, it seems.

Tags: ..

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Goat jury to be complete today?

August 16, 2011

GlobeGazette.com reports:

A Polk County jury was expected to be seated by Tuesday in the trial of Thomas Wheeler, the former director of the Iowa Film Office who is facing criminal charges related to a 2009 scandal involving the state tax-credit program for moviemakers.

The fun should start flying by tomorrow, then.

Flickr image courtesy carlfbagge under Creative Commons license.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

'Big idea' doesn't mean 'bad idea'

August 16, 2011

Tax scholar Joseph Thorndike rightly mocks the "big ideas" coming out of Washington's policy establishment:

Some wild White House advisers are just itching to trot out a bold new economic plan, according to the New York Times. The milquetoast crowd -- led by David Plouffe and William Daley -- support small bore initiatives, like free trade agreements and patent reform. By contrast, those wild radicals in the Democratic wing of the Democratic party want decisive action. As the Times reports:
others, including Gene Sperling, Mr. Obama’s chief economic adviser, say public anger over the debt ceiling debate has weakened Republicans and created an opening for bigger ideas like tax incentives for businesses that hire more workers...

This counts as a bold idea? Then sign me up for one of them fancy White House jobs, 'cause I got a million of 'em! Let me see, where did I put my old Clinton Administration budget proposals? Or the Carter ones? Or the Kennedy and Nixon ones?

But then Mr. Thorndike goes off the rails:

Seriously, call me when someone at the White House suggests a really bold idea. Like short-term stimulus spending, coupled with long-term debt reduction. A combination that everyone knows we need but no one is willing to defend.

Yeah, the $700 billion or so "short-term stimulus" we just tried, that worked just great.


Chart via Adamsmith.org

It's a really bold plan in the same way that driving as fast as you can to a red light at a busy intersection is bold. It also has a similar track record.

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

Big news for Americans in the UK: £30,000 'Remittance charge' qualifies for U.S. foreign tax credit

August 16, 2011

London may be burning, but there's one piece of good news for Americans across the pond. Andrew Mitchel explains the new IRS Rev. Rul. 2011-19.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Goat trial begins today

August 15, 2011

The centerpiece criminal trial in the Iowa film tax credit fiasco gets underway in Des Moines today. Former Iowa Film Office Director Tom Wheeler faces felony misconduct in office charges for his role in the disastrous program.

For Mr. Wheeler, the trial will be a harrowing experience, but for the rest of us, it promises comedy gold. The prosecution will try to lay the blame for this multi-million dollar disaster at Mr. Wheeler's feet. The defense will try to spread the blame around state government like a rogue honey wagon. His superiors at the Department of Economic Development will get splattered, certainly, but the manure hose will also be pointed at the Department of Revenue. From the Des Moines Register:

For example, Wheeler said, emails in his trial will show he sought guidance on various expenditures from the state Department of Revenue, including in-kind, deferred or sponsorship transactions in which no cash changed hands. Many industry experts later said such transactions should not have qualified.


Flickr image courtesy carlfbagge under Creative Commons license.

These money-for-nothing deals led to the issuance of millions of dollars of transferable tax credits by the Department.

The State Auditor's report outlining the disastrous administration of the program shows that Mr. Wheeler has plenty to answer for. But felonies? The trial looks like an effort to blame the fiasco on one inept bureaucrat. Whatever Mr. Wheeler's failings, he had a supervisor. He was appointed by a Governor, and his program was authorized by an almost unanimous Iowa General Assembly. None of these people face criminal charges, yet they bear the ultimate responsibility for the disaster. If bureaucratic ineptitude is a crime, they should just lock the state office buildings from the outside at night.

Other coverage: AP story

Tax Update film credit coverage:

Sharks circle goat
Iowa Film Follies: Harold Hill meets The Pussycat Dolls
Ten years for filmmaker Runge
Let them eat canapes

Complete Tax Update film credit coverage

Tags: .........

Link       Bookmark: del.icio.usDiggreddit

Corporations are people too!

August 15, 2011

Mitt Romney caught some grief for telling an Iowa State Fair heckler an obvious truth - corporations are people. They are a tool for people to organize their activities and cooperate to do things. That this is at all controversial is sad.

TaxVox explains:

He’s right, of course, in both the legal sense—the law treats corporations as if they are people—and in the economic sense—what happens to corporations affects people. Corporations are merely a legal convenience that people use to organize their businesses. That specifically applies to the taxes corporations pay: The corporation is the conduit but the burden of the tax falls on individuals. The question is “On whom?”

There are four main possibilities: the owners of the corporation, owners of capital in general, workers, and consumers.

If corporations aren't people, why on earth did the taxpayers bail out GM and Chrysler? If corporations aren't people, the case for the bailout goes from being merely lame to incomprehensible.

Christopher Bergin has more.

UPDATE: Welcome, Going Concern readers! Check out this take from David Henderson.

Tags: ......

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Down to the wire on the offshore amnesty

August 15, 2011

Jack Townsend has the latest on the IRS FBAR amnesty, including news on when you have to pay interest and penalties.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Isn't that like criminally impersonating a nerd?

August 15, 2011

A tax preparer in San Jose will spend 44 months in prison for pretending to be a CPA.

OK, not just that. He fraudulently obtained loans and didn't pay taxes for 20 years. The 44 months are probably for that stuff, as prentending to be a CPA is a crime that's its own punishment.

Russ Fox has the sordid details.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Using a security as security doesn't give you investment interest

August 12, 2011

Like any exotic subculture, the tax world has its own legends and superstitions. The Tax Court popped one superstition yesterday: the belief that you can turn non-deductible personal interest into deductible investment interest by securing the loan with stocks or bonds.

An Albuquerque couple bought themselves a nice house, financing it with a loan for $1,578,000. Longtime readers will spot a problem right away: that's more home loan than you can deduct interest on. The tax law only allows deductions of interest on loans up to $1.1 million: $1 million for acquisition debt plus $100,000 in home-equity debt. That left $478,000 of loan with no obvious deduction potential.

The couple tried to solve the problem by securing the loan not only with the house, but also with $650,000 worth of Intel stock. They then treated the extra interest as "investment interest," which is deductible to the extent of investment income (interest, dividends, and optionally, capital gain). Investment interest exceeding investment income carry over to later years.

It didn't work. The Tax Court explains (my emphasis, citations omitted):

The allocation of debt and related interest is not affected by the use of property to secure repayment. The temporary regulations under section 163 provide an example of a taxpayer who finances a car purchase for personal use with a loan and pledges corporate stock held for investment as security. The example treats the interest expense as personal interest and not investment interest, even though the loan is secured by investment property. Id.

Here, petitioners used investment property to secure repayment of a loan for a personal residence rather than a car. This distinction is without a difference. The use of investment property to secure repayment of indebtedness has no effect on the allocation of debt and interest. Rather, it is the "use" of the debt proceeds that determines the allocation.

They used the loan to buy the house, not the Intel stock. That means the only available deduction is for the house. If a home loan exceeds the $1.1 million limit, it is nondeductible "personal" interest.

The Moral? When you buy a really big house, it may be bigger than your mortgage interest deduction.

Cite: Ellington, T.C. Memo. 2011-193

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Beach reading for business

August 12, 2011

A worthy reading list from attorney-blogger Chris Branstad at IowaBiz.com, the Des Moines Business Record blog for entrepreneurs. I especially like the tax recommendation.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Farm Buildings and 100% bonus depreciation

August 12, 2011

Paul Neiffer summarizes:

If a farmer is constructing a new building and the construction commenced after September 8, 2010 and is finished before January 1, 2012, then the total cost is allowed to be 100% depreciated during 2011. If the building construction commenced before September 9, 2010 and was finished in 2011, then only 50% bonus depreciation is allowed (unless you can segregate out some components that can be 100% bonus depreciated this year).

This only applies to farm buildings. Non-farm residential or commercial real estate is not eligible for bonus depreciation, with a very limited exception for some restaurant buildings. If the bonus depreciation generates a loss, the usual rules limiting losses may apply -- basis limitations, at-risk rules, and the passive activity loss rules.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

It won't prevent fraud, but it will bring those CPAs down a notch

August 12, 2011

Robert D. Flach gives a long-form version of his argument for preparer regulation in a Forbes guest post. To his credit, Robert admits that preparer regulation will fail to stop crooked preparers. The remaining arguments fail to convince. Distilled, they come down to:

- The IRS will have a registry. Big deal.
- There will be a test -- a test that Robert agrees will be a joke.
- Finally, it will elevate the status of non-CPA, non-Enrolled Agent preparers like Robert:

The RTRP designation would put the competent, experienced, and ethical previously “unenrolled” preparer, again like myself, on an equal footing with the CPA in the eyes of the general public. It would dispel the unfounded “urban tax myth” that CPAs are 1040 experts. CPAs would no longer erroneously “own” the tax preparation business, as the AICPA told a member it believed they did.

That's a hugely unconvincing argument for a proposal that will divert IRS resources into pointless bureaucratic paperwork while raising prices to consumers -- especially in light of the ongoing neglect of other IRS priorities. And I think that Robert will be disappointed in his expectation that the market will value the RTRP as high as the CPA designation. While it will muddy the waters for Enrolled Agents, who have to pass a tough test and meet much stricter standards, the CPA designation has deep roots that giving additional initials to H&R Block preparers won't touch.

Tags: ..

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

IRS Issues Applicable Federal Rates (AFR) for August 2011

August 12, 2011

The IRS has issued (Rev. Rul. 2011-16) the minimum required interest rates for loans made in August 2011:

-Short Term (demand loans and loans with terms of up to 3 years): 0.32%

-Mid-Term (loans from 3-9 years): 1.90%

-Long-Term (over 9 years): 3.86%

The Long-term tax-exempt rate for Section 382 ownership changes in August 2011 is 4.17%.

Tags: ..

Link  • Applicable Federal Rates       Bookmark: del.icio.usDiggreddit

If you no longer own your S corporation shares, you no longer have their basis

August 11, 2011

The key advantage of owning S corporation shares is that you are only taxed once on the business income. If you withdraw your taxable income as a distribution, it is a tax-free return of your basis. If you leave your taxable income in the S corporation, it increases your basis in your shares, reducing your gain or increasing your loss on any eventual sale.

C corporations, in contrast, are taxed twice. The corporation pays tax on the earnings; the shareholder pays tax when the after-tax earnings are distributed or when they are recovered by selling the shares.

There's one catch: once you no longer own the shares, you no longer have basis. A California shareholder learned this the hard way in Tax Court this week.

The shareholder had 100,000 shares of S corporation stock with a basis of $866,795 -- all but $200,000 of which was retained S corporation earnings. In 2002 the shareholder gifted 95,000 of the shares to his son. Under the tax law, a gift recipient steps into the donor's basis. That left the donor-father with basis of $42,340.

Even so, the S corporation distributed over $600,000 to the taxpayer in 2003, when his remaining 5% stake generated $19,123 taxable income. The math didn't work.

While the taxpayer didn't report any income from the $600,000 distribution, the IRS saw it differently. When a distribution exceeds a taxpayers basis, capital gain results. The IRS assessed tax on a $548,664 capital gain.

The Moral? If you give shares away, you can't act like you still own them. While the tax law has some flexibility to allow "ex-dividend" distributions based on prior share ownership, that's limited. If your son owns the shares, he gets the basis.

Russ Fox has more.

Cite: Miller, T.C. Memo. 2011-189.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

IRS: destroying innocent taxpayers to free up resources to vex innocent preparers

August 11, 2011

Phil Hodgen's call for victims of the IRS campaign against innocent foreign bank account holders brought forth this story:

I’m a dual citizen who grew up and went to school in Canada and moved to the US a couple years ago. When I was in my late teens, my parents put $80k US in a Canadian bank account in my name to pay for my education. Now I want to do an MFA degree, but I’m afraid to touch the remaining money. I want to marry my fiance but we’re afraid that if we do the IRS will take his savings too. My life is on hold, and I’m scared.

My fiance was hoping I’d qualify for OVDI FAQ #17, but he says I didn’t report my interest correctly in 2008, made some other mistake in 2009, and before 2007 I thought of myself as a Canadian and didn’t even file 1040s.

One of the problems with the OVDI (Offshore Voluntary Compliance Initiative) is that the IRS didn't staff it adequately. In one instance I know of, the agent who invented $500,000 of taxable income for a taxpayer who actually had underreported $200 of taxable income admitted he had been pulled off another project suddenly to deal with amnesty applications.

If you think the IRS abuses are just isolated stories, think again. Jack Townsend reports that the New York Bar is calling on the IRS to make changes:

As a result, many taxpayers feel compelled to stay in the voluntary disclosure programs and accept inappropriately large penalties because they fear that if they opt out, they automatically will be assessed with huge information return penalties. Even innocent taxpayers with meritorious cases are hesitant to opt out and face crippling assessments that are many times the value of their foreign account and that could render them insolvent in the hope that they can convince an agent that they did not act willfully.

If you are going to try to encourage compliance, you don't encourage innocent taxpayers who have committed paperwork errors to stay out of the system by hammering those who come in from the cold. You don't shoot the jaywalkers. You do provide enough staffing to sort the innocent cases from the money-launderers, and you train your staff to know the difference.

Phil Hodgen tries to give IRS Commissioner Shulman the benefit of the doubt:

I have promised myself that all ad hominem attacks on the IRS Commissioner cease forthwith. So don’t expect any here, or in the future.

The heck with that. IRS Commissioner Shulman is diverting millions of taxpayer dollars in a wasteful and ill-conceived preparer regulation program, while shorting resources to the biggest IRS taxpayer compliance initiative. Innocent taxpayers are being terrorized and bankrupted. Other innocent taxpayers who would like to come into the system see the results and stay in the cold. Meanwhile, big-time money-launderers can come in, cut a deal, and avoid prison time. The responsibility is Commissioner Shulman's.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

State Fair Cavalcade!

August 11, 2011

The Iowa State Fair starts today!

If you can't make it to the fairgrounds, then take your deep-fried Twinkie to the Cavalcade of Risk! The Healthcare Economist hosts the new edition of the best roundup of insurance and risk-management blog posts in any state. Don't miss the Insureblog contribution on unusual risks.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Iowa film credit program has only $20 million of bleeding left to do

August 10, 2011

EasternIowaGovernment.com reports that the Iowa's remaining exposure to the disastrous Iowa Film Tax Credit program is down to $20 million. Before the program was shut down, it was estimated as high as $330 million.

The state has been negotiating settlements with film producers who lost their credits when the program collapsed. From the report:

The latest settlement was over $265,000 in state tax credits and nearly $60,000 in cash paid to the producers of a feature-length film called “Smitty.” Previous pre-litigation settlements of $450,000 were paid to Midsummer Films, which had registered six projects under Iowa’s now-suspended film tax credit program, and more than $434,000 paid to After Dark Films to resolve contract disputes regarding tax credits for the films “Husk” and “Fertile Ground.”

Sure, that might seem like wasted taxpayer money. But a Des Moines Register Columnist urged us to see the big picture before the program collapsed:

But some benefits can't just be measured on a dollar-for-dollar basis. The movies provide employment to local actors, construction crews, artists, caterers, drivers and a host of others. They expose non-Iowans to what the state has to offer. More intangible is the benefit of interactions in a state that can be cut off from the trends and centers of power. Not to mention the excitement factor. We've relied on caucuses every four years to bring action and celebrities to town. Now, sightings are anytime, any place.

Saturday, "The Experiment" had a wrap party downtown. Brody and Whitaker were there, mingling and posing for pictures. Frank Meeink was there. The Iowan who may have inspired the 1998 "American History X" has an acting role. Deb Cosgrove, the nurse, was there. She's been tending to the medical needs of the film's luminaries. Casey Gradischnig, local multi-media designer, was there. He's been working for Whitaker.

So there.

The article makes one factual mistake:

State Auditor David Vaudt issued a special report last year that determined only about 80 percent of the $32 million worth of the tax credits had been properly awarded.

No, 80 percent of the credits were improperly awarded.

But think of the intangibles! The parties!

The administrator of the program is scheduled to go on trial next week for felony charges of official misconduct. No charges will be filed against the legislators who voted the foolish program into existence, with only three dissents. No charges face the Governor who signed the program into law and appointed the administrator who oversaw the fiasco.

Tags: .........

Link       Bookmark: del.icio.usDiggreddit

Happy Hoover Day

August 10, 2011

The only President from Iowa was born in West Branch 137 years ago today.

20070810.jpg

Just has England hasn't had a second King Stephen, the US hasn't been willing to risk another Iowan as President.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Phil Hodgen seeks bloodied jaywalkers to go public

August 10, 2011

The way the IRS administers the foreign financial account (FBAR) reporting program, including the two botched amnesties, is the financial equivalent of shooting jaywalkers to stop speeders. Innocent violators of these obscure rules are treated like criminals and face ruinous penalties, while rich money launderers receive a pass from prosecution.

Phil Hodgen, an international tax attorney, is looking for some of these wounded jaywalkers to go public to try to improve the system:

We need real people willing to stand up and speak truth about their experience at the hands of the IRS. The only way things will change is when the real world sees the tragedies.

Is anyone out there willing to be visible and public about what happened to them in the amnesties? Contact me. It will go on YouTube.

The IRS wins by hiding the execrable things it does. We need some sunlight. I can’t disclose client information. We need a taxpayer to stand up and show the trivial tax liability coupled with a six figure penalty for FBAR violations.

Any takers?

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Now I'm hungry

August 10, 2011

Teaser from the ISU Center for Agricultural Law and Taxation:

Illinois Roadkill Bill Gets Squashed

Updated August 9, 2011 - The governor has vetoed legislation that passed earlier this spring allowing licensed hunters to count roadkill towards their bag limit per species. Updated recipe books on hold.

Mmmm... Pizza!

Tags: ..

Link  • Comments (2)       Bookmark: del.icio.usDiggreddit

Iowa needs a tax court

August 09, 2011

humpty.jpg

"When I use a word," Humpty Dumpty said in a rather scornful tone," it means just what I choose it to mean -- neither more nor less."

An Iowa district court has ruled that the Iowa Department of Revenue can take the Humpty Dumpty approach to the tax law.

The case covered the pre-1997 version of the Iowa Capital Gain Exclusion. This break exempts some capital gains from income when a taxpayer has both "held" a business asset for 10 years and has also "materially participated" in the business for 10 years

IDOR regulations cooked up a definition of "held" for this purpose that doesn't appear anywhere else in the tax law -- one that ignores holding periods that carry over for other purposes, like gifts or tax-free exchanges. The legislature overrode the IDOR interpretation for post-2006 years, but did not address the pre-2006 regulation.

The Department's regulation is abusive and ridiculous. As we noted in 2005,

Iowa has had no difficulty adapting federal holding period rules for other "unique" Iowa purposes. For example, Iowa has a special exclusion for farmers for sales of cattle or horses held for 24 months. The Department adopted federal holding period rules for this deduction, which has no direct federal counterpart. (Subrule 40.38(2))

If the legislature doesn't provide a specific definition of a word when it passes a tax law, the sound and sensible assumption is that it means the same thing that it means elsewhere in the tax law.

Even so, the Iowa District Court upheld this ridiculous reading (footnotes omitted, emphasis added):

This term was not defined within the statute at the time the petitioners filed the return in question. In addition, the term has substantive meaning within the special expertise of the agency relating to when or to what extent an asset is considered a capital asset. This, along with the aforementioned rulemaking and enforcement authority delegated to the agency by the legislature, leads the court to conclude that the interpretation of the term "held" in 422.7(21)(a) has been clearly vested with the agency. Accordingly, the court will affirm the agency unless it concludes that its interpretation of the term is irrational, illogical or wholly unjustifiable.

It is all three, but the court sided with the Department anyway.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Loss Harvesting: beware wash sales

August 09, 2011

The stock market debacle of the last few days has left many of us with some potential capital losses. If you were astute enough to cash out some capital gains earlier this year, the time might be right to cash out some capital losses to offset them -- capital losses are allowed for individuals to the extent of capital gains, plus $3,000.

If you do take capital losses, remember that the "wash sale" rules will thwart your capital loss deduction if you replace the sold loss stock in the 30 days before or after the loss sale.

TaxGrrrl has a timely explanation of the capital loss rules at her Forbes blog.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Revenue cameras raise $39,000 for Des Moines, $27,000 for Gatso

August 09, 2011

The Des Moines red-light camera racket announced its take for its first month. The key point:

The City of Des Moines pays the vendor of the red light cameras $27 from each $65 red light ticket. It pays the vendor $25 from each speeding ticket.

20110609-1.png

Not a word about how many accidents were created or saved. But remember, it's about safety, not revenue.

UPDATE: Pushback at baniowacams.com

Tags: ...

Link  • Comments (1)       Bookmark: del.icio.usDiggreddit

Offshore account 'amnesty' deadline looms

August 09, 2011

The 2011 Offshore Voluntary Disclosure Initiative expires August 31, as Peter Pappas and Kay Bell remind us. If you have big undisclosed accounts you have been using to evade U.S. taxes, it can be a sweet deal. If you have accidentally missed a minor amount of taxes because you were unaware of the foreign account requirements, the program may not be so sweet.

Related: Offshore account holders: should you use the 'amnesty'?

Tags: .....

Link       Bookmark: del.icio.usDiggreddit

IRS issues guidance for 2010 estate tax filings; returns due November 15.

August 08, 2011

The IRS has finally issued the rules for estates of 2010 decedents. The guidance is crucial for estates using the election available for those dying in 2010 to pay no estate tax in exchange for a limited basis adjustment. Roger McEowen explains the new guidance; some key points:

Form 8939 is the form to be used to both elect out of the estate tax and make the income tax basis allocations applicable for deaths in 2010. The election, once made, is irrevocable. If a filing has already been made purporting to make the election, it must be replaced with a Form 8939 filed by November 15, 2011. The filed Form 8939 must show the basis allocations for the assets in the estate.
The TaxProf has more. Links: Notice 2011-66 Rev. Proc. 2011-41

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

What happens if you click on an IRS phishing e-mail?

August 08, 2011

Nothing good:

Bearing the caption "Internal Revenue Service United States Department of the Treasury," the malicious electronic mail tells the recipient that he has committed tax fraud. In this connection he should examine his tax statement by following a given web-link to the IRS site. But when the user follows the web-link, he's prompted for taking down one newly launched LICAT variant, which Trend Micro identified as TSPY_ZBOT.WHZ.

Amazingly, similar to any LICAT sample, TSPY_ZBOT.WHZ produces Web-addresses with the help of a computation keeping the present date as base. It (the Trojan) links up with the Web-addresses so the configuration file associated with it can be downloaded. The file, reportedly, consists of information regarding the Internet sites which it'll keep watch on along with the website onto which it'll transmit all stolen info. What's more, the malware as well seems like focusing on the standard activities of ZBot which include stealing of data as well as attempts at bypassing detection by anti-virus software.

Remember, the IRS will not send you email notifying you of an exam, return changes, refunds, or anything of the sort. The IRS does all of that by standard mail. Unless you have already been in contact with an IRS agent, and you are sure that an e-mail is from that agent, you should just delete any purported IRS e-mail without opening it.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

When does a non-citizen have to file U.S. tax returns?

August 08, 2011

Phil Hodgen does the math.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Sharks circle goat

August 05, 2011

Things got a little hotter for Tom Wheeler, the former director of the Iowa Film Office, today. O. Kay Henderson reports an announcement that filmmaker Bruce Elgin has pleaded guilty to a reduced misdemeanor charge and will cooperate with prosecutors -- presumably against Mr. Wheeler. Mr. Elgin had faced felony charges.

Mr. Wheeler faces charges of felony misconduct in office arising out of his administration of the Iowa Film Tax Credit program, which collapsed in scandal in 2009. Subsequent investigations have revealed systematic abuse and chaotic administration of the program, including funding of luxury cars for filmmakers.

While Mr. Wheeler seems to have been cast for the role of scapegoat in this production, the legislature that passed the ill-conceived program with only three dissenting votes faces no charges; nor does the former Governor who signed the program into law and appointed Mr. Wheeler to run it.

Mr. Wheeler's trial is scheduled to begin later this month.

Related:

Iowa Film Follies: Harold Hill meets The Pussycat Dolls

Let them eat canapes

Complete Tax Update film credit coverage.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Sales Tax Holiday!

August 05, 2011

Iowa's annual sales tax holiday runs today and tomorrow for purchases of "select clothing and footwear." So get busy!


Flickr image courtesy Kyle McCluer under Creative Commons license

The Department of Revenue website has the scoop:

- Exemption period: from 12:01 a.m., August 5, 2011, through midnight, August 6, 2011.

- No sales tax, including local option sales tax, will be collected on sales of an article of clothing or footwear having a selling price less than $100.00.

- The exemption does not apply in any way to the price of an item selling for $100.00 or more

- The exemption applies to each article priced under $100.00 regardless of how many items are sold on the same invoice to a customer

What doesn't count:

watches, watchbands, jewelry, umbrellas, handkerchiefs, sporting equipment, skis, swim fins, roller blades, skates, and any special clothing or footwear designed primarily for athletic activity or protective use and not usually considered appropriate for everyday wear.

Kay Bell has a calendar of upcoming sales tax holidays nationwide, while The Tax Foundation has a handy map. Sure, these things are bad policy -- and not just because "back to school" sales throw a big wet blanket on the remaining weeks of your kids' summer vacations. Still, it's a great weekend to go buy stuff.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

IRS loses another 'defined value' gifting case

August 05, 2011

Just because the IRS hates something doesn't mean it can't work. The IRS hates "defined value" gifts. In these deals, a donor makes a gift -- either a charitable gift or a gift as part of an estate plan -- of property, typically shares of closely-held stock. As part of the gift, the donor states an agreed value for the gift; the donor also agrees to add enough shares to the donation to get to that value if the IRS reduces the share value on examination.

The IRS hates these because if it wins a valuation argument on examination, there is no deficiency; the charity is still entitled to the same value of donation, just split over more shares.

The Eighth Circuit, which covers Iowa, has upheld these clauses. Now the Ninth Circuit, which covers California and other Western states, has upheld such a clause. From the opinion:

Absent the audit, the foundations may never have received all the units they were entitled to, but that does not mean that part of the Taxpayer's transfer was dependent upon an IRS audit. Rather, the audit merely ensured the foundations would receive those units they were always entitled to receive.

Victory for taxpayers. These formula clauses are likely to become a standard planning tool now that they have been approved by the Tax Court and two appellate courts.

Cite: Estate of Anne Y. Petter, CA-9, No. 10-71854 (8/4/2011)

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Snipes strategy fails in Bakersfield

August 05, 2011

The team of tax geniuses that got Floridian Wesley Snipes where he is today was also active out west. A Bakersfield man got bad news this week from two different courts after working with tax advisors linked to the jailed actor.

Mark DeVries was a plumbing contractor. He stopped filing tax returns, and in time IRS agent RA Chynoweth was assigned to find out why. The Tax Court outlines the unconventional approach Mr. DeVries and his advisors took with the IRS examination:

Petitioners' representative and attorney, Milton H. Baxley II (Mr. Baxley), sent letters to the institutions to which RA Chynoweth issued summonses. Petitioners authorized both Mr. Baxley and Mr. Bryan Malatesta, on Forms 2848 attached to each of the letters, to represent them for the years 1985 through 2004. The letters stated that the relevant IRS summons was unauthorized by statute, the Code has not been enacted as positive law, the IRS is not an agency of the United States government and the institution will be held liable if the requested documents are released without court order. Mr. DeVries and the IRS were each sent a courtesy copy of each of the letters.

Later that year, Mr. Devries' son Jason Henry DeVries sent an invoice for $1 million to RA Chynoweth, billing the revenue agent for the use of purportedly copyrighted property.

Mr. Baxley was involved in the Snipes IRS examination too. He was enjoined in 2003 from a number of tax activities.

The rather aggressive response to the IRS exam continued. Again from the Tax Court:

During the examination, Mr. DeVries also made a Freedom of Information Act (FOIA) request for RA Chynoweth's personnel file.

Mr. DeVries filed a lawsuit in the California Superior Court, Kern County, against IRS Revenue Officer Douglas McDonald and RA Chynoweth in 2002.8 Mr. DeVries alleged interference with contractual relations, libel, slander, nuisance, intentional and negligent infliction of emotional distress, trespass, conspiracy and imposition of a constructive trust. Mr. DeVries sought over $50 million in damages plus significant punitive damages and injunctions. He caused RA Chynoweth to be served with the lawsuit by a process server at his personal residence. Mr. DeVries' lawsuit was eventually dismissed.

Ultimately, petitioners' efforts to derail RA Chynoweth's investigation failed.

Failed? Imagine that.

The aggressive approach failed yesterday in Tax Court, which upheld 75% penalties for fraudulent failure to file tax returns. It failed also in the criminal case that resulted from the exam; on Monday a federal judge sentenced Mr. DeVries to 27 months in prison -- short of Mr. Snipes' 36 months, but no fun in any case.

The Moral? Suing your IRS agent for "libel, slander, nuisance, intentional and negligent infliction of emotional distress, trespass, conspiracy and imposition of a constructive trust" hasn't worked yet. Perhaps a less confrontational approach to IRS exams would have been wise.

Cite: DeVries, T.C. Memo. 2011-185

Tags: .......

Link  • TrackBacks (1)       Bookmark: del.icio.usDiggreddit

Earned income credit veto: heartless, or good policy?

August 04, 2011

Governor Branstad's item-veto of an increase in Iowa's earned income credit -- from the current 7% of the federal credit to 10% -- has gone down poorly in some circles. The left-side tax policy group Citizens for Tax Justice calls the veto "one of the worst cases we’ve seen of kicking them while they’re down." The Iowa Fiscal Partnership says the veto "hurts working people and the economy." There is talk of a special legislative session to override the veto.

The Governor cited the $28 million estimated cost of the added credit in his veto message, adding:

It is my desire to approach tax policy in a comprehensive and holistic manner. As such, I urge members of the House and Senate to continue to work with my office on an overall tax reduction package that both fits within our sound budgeting principles while reducing those taxes that are impeding our state's ability to compete for new business and jobs

The Earned Income Credit is best understood as a welfare program. It applies when taxpayers have some income from wages and self employment income, but it phases out quickly as income rises. If the credit computed exceeds tax liability, the taxpayer gets a check for the difference. In effect, the Governor vetoed a 42% increase in a means-tested welfare program.

The Earned Income Credit, like other refundable credits, is a fraud magnet. The GAO estimates a 25% error rate in claiming the credit for 2010. Assuming that rate applies to Iowa's piggyback credit, that means $7 million of the $28 million would have been issued in error.

The way the credit phases out quickly as income rises also has the perverse effect of imposing a penalty on taxpayers who are rising out of low incomes. When combined with other means-tested phase-outs, you can get results like this, with marginal rates over 100%:

Source: Clifford F. Thies, "The Dead Zone: The Implicit Marginal Tax Rate." Click to enlarge

Increasing the piggyback Earned Income Credit would increase this perverse penalty rate, which can make getting a raise a money-loser.

Iowa's complex system, with its high rates and byzantine loopholes, is rated one of the worst for business in the country. While the Governor hasn't gotten behind real "holistic" tax reform -- like the Tax Update's Quick and Dirty Iowa Tax Reform Plan -- it's a good bet that a better Iowa tax system would do much more for Iowa's working poor than a boost in the EIC. It's too bad that Iowa's political leadership doesn't seem to be moving in that direction.

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

When is a tax deduction the same as spending?

August 04, 2011

Not all tax breaks are the same as government spending, but you can run government spending through the tax law. An essay by Richard A. Epstein ponders the differences:

For now, let’s start with the worst of the breed. The various tax credits that are given to the producers of ethanol, for example, are a cardinal illustration of gross government misbehavior. The payments in question take the production of ethanol, which normally would occur at a loss, and convert it into a gain.

...

While it is easy to identify and denounce these tax expenditures, the issue is more complex when we consider others, like home interest deductions, the health care insurance exclusion, charitable deductions, state and local income and property taxes, capital gains, and tax deferment on pension contributions. Unlike the industry-specific tax expenditures that deserve universal condemnation, these issues resist easy fixes.

The easiest cases to identify as spending are refundable and transferable tax credits, like the Ethanol credit, the Earned Income Tax Credit, and the late Iowa film credit. These turn the income tax return into a payment claim voucher. Deductions for favored activities are harder cases, but where the government is trying to steer economic activity in courses favored by politicians, the results are still likely to be bad.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Nice lemonade stand you have there, kid. Shame if something happened to it.

August 04, 2011

The Eastern Iowa town of Coralville firmly stomped out kid-run lemonade stands during the big RAGBRAI bike ride, and GlobeGazette.com reports that city fathers are proud of themselves:

Cedar Rapids television station KCRG (http://bit.ly/pm21nJ ) says at least three stands run by children were closed down because they hadn't obtained permits and health inspections.

...

Josh Schamberger is president of the Iowa City/Coralville Convention and Visitors Bureau. He told KCRG that the two-day ordinance was passed to protect riders from health risks. He says other Iowa towns have adopted similar ordinances for years.

Coralville City Administrator Kelly Hayworth says the city was trying to regulate hundreds of vendors in order to stay in step with the county health department.

A two-day ordinance? So public health isn't threatened by lemonade stands most of the time, just when there are a lot of customers. Arnold Kling has some thoughts that apply here:

For libertarians, government is like a Mafia Godfather, carrying out a protection racket. It is a criminal organization that controls certain economic activities through the use of force. It obtained its status by ruthlessly stamping out competitors.

To someone on the left, government is more like the adult supervision at a day care center. It sets the rules, provides structure, and prevents what otherwise would be dangerous behavior and chaos.

I think of government as a monopoly offering lousy service and determined to maintain and extend its franchise come hell or high water.

To me, the key to understanding Coralville is the phrase "...because they hadn't obtained permits and health inspections." Permits mean revenue. Health inspections are the fig leaf to justify extorting the revenue.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

The debt ceiling went up. Will taxes?

August 03, 2011

The debt-ceiling show has gone on intermission, making the stock market so giddy that it accidentally dropped 265 points. The administration didn't get the tax hikes it wanted, but it thinks it will get a mulligan when the committee of 12 congresscritters called for in the agreement gets together to negotiate $1.5 trillion in "deficit reductions" by November.

The agreement is apparently written to keep tax hikes from being part of the reductions by using current tax rates as the "baseline" for revenues. That means the 2013 increase in tax rates scheduled under current law wouldn't count as "deficit reduction" under the deal. While Obama advisor Gene Sperling seems to think he has room to weasel, the Tax Foundation takes this rule as a given, and another economist calls Mr. Sperling's argument "absurd." At Tax.com, Martin Sullivan says:

But I will say the Sperling interpretation that "anything goes" when it comes to baselines would render the whole Phase Two $1.2-$1.5 trillion of deficit reduction meaningless. In the extreme, the Committee could assume a baseline of government spending equal to 50 percent of GDP and avoid the triggers by proposing cuts to more normal levels.

That means income tax increases will only count to the extent they raise top rates over 39.6 percent -- a political impossibility. It also seems unlikely that a new broad based tax, like a VAT, will be enacted. There might be some efforts to trim deductions and tax credits, but unless accompanied by rate reductions to sweeten the deal, those are hard to do.

The agreement calls for "fail safe" spending cuts absent an agreement by November. That may well be the way to bet.

UPDATE: A Sperling defender on the right.

The TaxProf rounds up commentary on the deal.

Related:

Debt ceiling deal: no new taxes (maybe)

If the government doesn't restrain its spending, the rich guy isn't picking up the tab

Tags: .......

Link       Bookmark: del.icio.usDiggreddit

I borrowed money. I didn't pay it back. They foreclosed. I was robbed!

August 03, 2011

With the ongoing wave of foreclosures, it's not surprising that folks who have lost their houses are trying to find a tax break for it. A couple in Tax Court yesterday lost an attempt to call their foreclosure a "theft loss." From the opinon:

The record demonstrates that the foreclosure and sale of the residence were properly executed within the full force of California State and Federal Law. The legality of the foreclosure was confirmed by multiple sources, including the Office of Thrift Supervision and the Office of the District Attorney for Riverside County. In their brief it appears that petitioners are alleging that recording errors occurred during the foreclosure procedure that constituted criminal activity. However, petitioners have not provided adequate evidence to support their claim that such errors occurred or if they did, that such errors constituted criminal activity.

Judge Wherry questioned whether the taxpayers effectively focused their efforts (my emphasis):

This Court has previously questioned whether an illegal foreclosure action is a theft for purposes of section 165(c). See Johnson v. Commissioner, T.C. Memo. 2001-97. We need not decide this issue, however, because petitioners defaulted on their loan and have failed either to show that the foreclosure action was illegal pursuant to the deed of trust securing that loan or to substantiate the alleged theft loss. The Court is sympathetic to petitioners' economic problems and the need to annually pay property taxes without regard to employment status. But practical considerations would dictate that Mr. Nagel seek other gainful employment to assist Mrs. Nagel in her efforts to support the family and avoid foreclosure in lieu of spending excessive time and effort fruitlessly fighting the foreclosure, property taxes, and income tax obligations.

Ouch.

Cite: Nagel, T.C. Memo. 2011-184

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Carnival of the cool

August 03, 2011

It won't reach 90 today for a change, so get out to the Carnival!

That's Kay Bell's Carnival of Taxes, a roundup of good stuff from tax blogs everywhere.

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

Vinton, Tama Chinese restaurant scene staggered

August 02, 2011

An owner of Chinese restaurants in Tama and Vinton, Iowa got a harsh review from U.S. District Judge Linda Reade yesterday: No stars, but six-and-a-half years. From the Cedar Valley Daily Times:

An Iowa couple, who continued their criminal conduct even after they pleaded guilty to federal charges, were sentenced today on multiple federal charges including health care fraud, tax evasion and harboring illegal aliens.

Chan Duong, age 45, from Vinton, Iowa, received a 78-month prison term after a December 14, 2010, guilty plea to harboring illegal aliens and filing a false 2007 federal income tax return.

The couple operated Peony restaurants on Vinton and Tama, using illegal immigrant employees while not paying taxes, according to the trial information document.

No word on whether their fortune cookies foretold this result.

UPDATE, 8/2: Judge shows no leniency to Vinton couple.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Shooting jaywalkers so we can slap the real criminals on the wrist

August 02, 2011

Attorney Jack Townsend has another must read post about the horrible administration of the IRS offshore voluntary compliance program -- a program that treats an expat or green card holder who has tried to pay all taxes due just like it treats a money-laundering tax evader.

I am concerned that the IRS does not have any idea as to the damage it is doing among this group of people whose footfault was small on any relative scale and in many cases non-existent in terms of culpability (they really did not know they had income tax and FBAR reporting obligations).

Read the whole thing. Everything in it is consistent with what I've seen.

Related: Offshore account holders: should you use the 'amnesty'?

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

"I am not a fan of or a participant in 'social media'."

August 02, 2011

Blogs Robert D. Flach, in a post accessable from his Twitter feed.

OK, then!

Tags: ..

Link       Bookmark: del.icio.usDiggreddit

The IRS doesn't want to finance your vacation

August 02, 2011

My new post at IowaBiz.com, the Des Moines Business Record's group blog for entrepreneurs.

Tags: .

Link       Bookmark: del.icio.usDiggreddit

Debt ceiling deal: no new taxes (maybe)

August 01, 2011

It looks as though the debt ceiling deal won't do anything to the tax law, at least for now. TaxGrrrl reports:

What’s not in the agreement? Not. a. single. word. about. taxes. That, my friends, will change. Mark my words.

Shocking, if you thought deductions for business jets were the sole cause of the national debt. Via Instapundit, Daniel Mitchell of the Cato Institute explains where taxes may creep into the picture:

Here’s what Democrats like:
There appears to be nothing in the agreement to preclude the super-committee from meeting its $1.5 trillion target with tax revenue. The 2001 and 2003 tax legislation is not an option, but everything else is on the table (notwithstanding GOP claims that it is "impossible for Joint Committee to increase taxes").

In other words, there is a risk of tax hikes, just as I warned last week. Indeed, the five-step scenario I outlined last week needs to be modified because now a tax-hike deal would be “vital” to not only “protect” the nation from alleged default, but also to forestall the “brutal” sequester that might take place in the absence of an agreement.

But you don’t have to believe me. Just read the fact sheet distributed by the White House, which is filled with class warfare rhetoric about "shared sacrifice."

Still, if the 2001-2003 Bush-era rate cuts aren't on the table, it will be hard to raise taxes in a big way. They would either have to enact something like a VAT ahead of the election -- which would probably be suicidal -- or they would have to nickel-and-dime their way there one tax break at a time, arousing an angry swarm of lobbyists.

Tags: ......

Link       Bookmark: del.icio.usDiggreddit

Smurfs: the crime ring

August 01, 2011

While the popularity of the Smurfs movie may be hard to explain, I get "smurfing." It involves trying to avoid those pesky bank cash reporting rules. The consequences can be worse than sitting through a bad movie.

A Texas house-framer, Juan Gonzalez, had a good business going, but he didn't much care to pay taxes. So he turned to the little blue people. My Sanantonio.com reports:

But he got in trouble because he had been "structuring" to deceive the government, also known as "smurfing" — executing financial transactions in a pattern to avoid the creation of certain records and reports required by law.

Between August 2003 and November 2005, Gonzalez wrote checks of less than $10,000 from the company's bank account to relatives and others, had them cash the checks and return the cash to him. He then paid himself and subcontractors, but kept no contemporaneous records.

This is the sort of thing you might get away with once or twice, but when you are grossing $4.4 million, like Mr. Gonzalez supposedly did, it will catch up with you before long.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

You can't afford to fall behind on your payroll taxes

August 01, 2011

Falling behind on payroll taxes is often fatal for small businesses. Arden Dale explains atSmartMoney Tax Blog:

Once the IRS adds its penalties, the debt can snowball. Companies can be fined for outright failure to pay or to report on the tax, and also for paying late — that is, if it misses by more than two-and-a-half days the deadline for depositing the funds with a bank or other authorized institution, which then forwards them to the IRS. Fines for late payment can go as high as 25% of the tax due. Sometimes employers hesitate to file a tax report when they have fallen behind on payments, and that just compounds their problems and triggers more penalties.

And if the business goes under, the IRS can still collect from "responsible persons." So remit your payroll taxes on time, no matter how crabby the other creditors are getting.

Tags: ...

Link       Bookmark: del.icio.usDiggreddit

Offshore account holders: should you use the 'amnesty'?

August 01, 2011

Criminal tax defense attorney Jack Townsend explains how he helps clients sort out the pros and cons of telling the IRS about your offshore account reporting shortcomings. It's a must-read if you are considering the IRS Offshore Voluntary Disclosure Initiative, which runs through August 31.

Meanwhile, Phil Hodgen, another attorney working on offshore matters, gives some comic relief to this grim business:

We needed copies of prior-filed FBARs for a client. (We didn’t know whether one was filed, and if one was filed, we didn’t know what it said.)

In order to get a copy from the IRS you have to pay a fee. The fee is calculated by the number of pages on the form.

OK. We need to know the number of pages of a form we’ve never seen? What the hell. We guess and send a check.

Bounce! Request for copies rejected.

We got a letter back saying we paid too much (by $2.70!) so our request for a copy was rejected and the check was returned. Helpfully they gave us the correct amount to pay.

Now we know how many pages there were on the originally-filed FBAR form. And we know that an FBAR was in fact filed.

Your government, hard at work!

Tags: ....

Link       Bookmark: del.icio.usDiggreddit

Email: jkristan@rothcpa.com  •  Phone: (515) 244-0266
All content © Roth & Company, P.C.  •  Powered by Movable Type  •  Site by Sekimori Design