Tax Update Blog: February 2012 Archives
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Why the IRS audits Schedule C's
February 29, 2012
A scary headline: "Freelance? An IRS audit may be in your future."
A Tax Court case yesterday shows why a Schedule C on your return might interest the tax man. A New York City taxpayer filed a Schedule C return for his "marketing" business showing no income, but $14,027 in expenses -- reducing his tax liability by $3,995.
The IRS took a closer look, and the Tax Court takes up the story:
The total expenses claimed in the 2007 Schedule C included claimed "Other expenses" of $12,294.4 Those "Other expenses" consisted of the following expenses that petitioner claimed for: (1) "Training costs" of $10,182, (2) "Telephone and internet" of $539, and (3) "Dues and Subscriptions" of $1,573.Of the total "Training costs" of $10,182, $7,742 related to online course materials and online coaching materials, and the remaining $2,440 related to travel, meals, and lodging. Of the total "Telephone and internet" expenses of $539, $48.20, $50.20, and $133.73 were for expenses charged by "Domain names/Hosting", "Domains/Hosting SRVC", and "Domains/Hosting", respectively, and the remaining $306 was for expenses charged for petitioner's Time Warner Cable service.5 Of the total "Dues and Subscriptions" of $1,573, $335, $140, $53, $633, $44, and $215 were for expenses charged for mailbox rentals, Word Champion Edge "web and spkrs", Franklin Covey, periodicals, credit reports, and software, respectively.
Gee, it almost looks like he was claiming business deductions for personal expenses. The Tax Court didn't have to decide that; it just had to decide that he wasn't really trying to make money:
A taxpayer is entitled to deduct all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Sec. 162(a). In order for an activity of a taxpayer to constitute the carrying on by the taxpayer of a trade or business within the meaning of section 162(a), the taxpayer's primary purpose for carrying on the activity must be for income or profit...Petitioner relies principally on his own testimony and certain documents that the parties stipulated (petitioner's documents) to establish his position that the "Other expenses" that he claimed in his 2007 Schedule C and that remain at issue satisfy all of the requirements of section 162(a) and therefore are deductible under that section. With respect to petitioner's testimony, we found it to be uncorroborated, self-serving, vague, general, and/or conclusory in certain material respects...
On the record before us, we find that petitioner has failed to carry his burden of showing for his taxable year 2007 that the primary purpose for any activities that he may have undertaken with respect to his claimed THJ marketing business was for income or profit, that he was involved in his claimed THJ marketing business with continuity and regularity, and that his claimed THJ marketing business was a going concern.
Early in my career another preparer told me that she made sure all of her clients had a Schedule C so they had a place to deduct personal expenses. That motive is behind many multi-level marketing Schedule C businesses. It's not that easy. The IRS over the decades has caught on, and money-losing Schedule C's, especially those with little or no top-line income, have become invitations for a visit from your neighborhood revenue agent.
Cite: Henderson, T.C. Memo 2012-54.
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Tax shelter leads to state hangovers
February 29, 2012
"Save now, pay later. 2-for-1 tax savings!"
Ah, for the good old days of real estate tax shelters. Until the 1986 enactment of the "passive loss rules" killed them off, they sold like cheap beer. Like too much cheap beer, they led to hangovers. Peter Reilly explains how a shelter built around Pittsburgh's U.S. Steel Tower, 600 Grant Street LP, gave one investor to a Pennsylvania-sized tax headache:
Mr. Marshall put about $150,000 into the partnership and received a little more than $6,000 in distributions over the roughly 20 years that he owned an interest in the partnership. The real estate was sold at a sheriff’s sale in 2005 without generating any net proceeds for the limited partners. In 2008, Revenue (as the Court refers to the department) informed Mr. Marshall that he owed Pennsylvania $165,055.24 for 2005.
Read the whole thing for a cautionary tale on tax shelter investing.
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Windy leap-day Carnival!
February 29, 2012
You get a free day today! Use it to blow into Kay Bell's place for the new Carnival of Taxes!
Austin's greatest tax blogger has rounded up the best the tax blog world has to offer, so ride like the wind over there!
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You call that 'intelligent'?
February 29, 2012
From WLWT.com:
CINCINNATI -- One area business owner pleaded guilty Tuesday to tax fraud charges, and another was sentenced on similar charges.James Simon, owner and operator of Business Intelligence, admitted to skimming more than $1 million from his private investigation company to avoid paying taxes.
It seems that "Business Intelligence" may not be a more apt name than "Fo Sho Dough Tax."
UPDATE: Russ Fox has more.
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Your corporation's income tax bill dies when it does -- but you can take it with you
February 28, 2012
People form corporations because they are like Las Vegas, in a way: what happens there stays there. If the corporation goes broke owing income taxes, for example, the IRS can end up holding the bag. But like those who put pictures of their Vegas adventures up on their Facebooks, corporate owners can find their taxes following them home.
It worked that way for a Colorado man who was the sole shareholder of Colorado Gas Compression, Inc. The corporation dissolved in 2005 with the IRS saying that it owed nearly $5 million in taxes, interest and penalties. Too bad, so sad, IRS, right?
Not so fast. The sole shareholder took $3,671,110 in cash out of the business during and after the years in which the tax accrued. The court held that the shareholder was on the hook for the taxes to the extent of the funds taken out, and -- depending on the timing of the cash distributions and the interest assessments -- perhaps for the interest owing also.
The moral? What happens on your corporation income tax return stays in the corporation -- unless you bring home some incriminating souvenirs, like cash from inside the company. Of course you never get away from unpaid payroll withholding taxes if you are a "responsible person."
Cite: Holmes, DC-COLO, No. 1:08-cv-02446
Flickr image courtesy Daquella manera under Creative Commons license.
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IRS has no use for leap year
February 28, 2012
Russ Fox explains:
The deadline for mailing Form 1099s and Form 1096s to the IRS does not change in a leap year. If you file paper forms, they are due tomorrow, February 28th. That’s a postmark deadline, so go to the post office and mail the forms using certified mail, return receipt requested.
Oddly, copies of W-2s for the Social Security administration do get an extra day for leap year. If you file them electonically, though, you have until the end of march.
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The muskrats got a continuance
February 28, 2012
"Beavers to be in court Friday on tax charges"
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Fizzle fo shizzle
February 28, 2012
What happened to the customers of a Murray, Kentucky Tax prep business is terrible. Still, they ignored some clear warning signs -- like the name on the door. From wpsdlocal6.com:
MURRAY, Ky. — A local tax prep business in trouble with the law tonight. The owner of the Main Street business "Fo Sho Dough Tax" in Murray is nowhere to be found.Police have warrants out for Silvia Jones after an investigation indicated thousands in client's refunds were going directly into her business account.
Very clever how they dropped the enunciated "r" at the end of the first two words, but properly spelled out the silent letters at the end of "dough." Perhaps they felt they would be confused with a hair salon of they shortened it to "do." Whatever it spells, it's not "classy high-end preparer what could possibly go wrong?"
It sounds like they may have offered products other than tax services:
They also report finding four pounds of marijuana in the home where the business is located and arrested another woman who lives there.
Though to be fair, it's possible they were just trying to understand the thinking of the congresscritters who wrote the tax law.
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The map that the Iowa General Assembly isn't talking about this year
February 27, 2012
The weekly map from the Tax Policy Blog:
Yes, Iowa's among the worst. It doesn't have to be.
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Stop bothering me for your refund, we have preparers to regulate and jaywalkers to shoot
February 27, 2012
When it comes to creating futile busywork for law-abiding preparers and terrorizing Americans abroad, the IRS seems to have plenty of resources. When it comes to giving you back your overpaid taxes, well, what's your hurry? From woi-tv.com:
If your tax accountant says you're getting a refund on your tax return, don't expect it too soon. Because anyone who filed their tax returns between Feb. 6th - 10th may not be getting their tax refunds.Over 2.5 million Americans are estimated to have been affected by the delays.
"From our experience about 80 percent of the people that filed in that period have had their returns delayed," said Steve Sandvold, who owns liberty tax service. "Some have not received their refunds yet."
Just be glad you're getting a refund, you peasants! We're too busy issuing PTINs to worry about your silly refund!
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Doing the math
February 27, 2012
Congressional Budget Office head Douglas Elmendorf :
By the end of the coming decade, unless we cut federal spending apart from Social Security and the major health care programs below the unusually low share of GDP it is already projected to reach, stabilizing federal debt relative to GDP will require us to cut spending on Social Security and federal health care programs by about one-quarter, raise taxes by about one-sixth, or do some combination of those approaches.
Via the TaxProf.
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You get what you pay for, refundable tax credit edition
February 27, 2012
Refundable credits give rise to fraud schemes like day follows night. When you can get a check just for making up numbers and sending a form in, that's irresistable to scammers. A plea agreement in an Iowa case shows how it's done; The Des Moines Register reports:
Records show Denise Brown, whose age and hometown were not available, signed a plea agreement last week acknowledging she made false statements to an Internal Revenue Service investigator in 2010 and committed perjury in front of a grand jury....
On her own tax returns for 2009, Bailey falsely claimed she had personal income for operating an “interior decorating” business to increase the amount she received under the Earned Income Tax Credit. She told the IRS that Brown and others were customers.
You just invent a little schedule C income, and in comes the government money. The IRS fights it mightily, but inevitably billions of dollars in scammed tax credits will be issued. The current effort to nearly triple the Iowa earned income credit -- from 7% of the federal credit to 20% -- won't help.
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Helping your friendly neighborhood preparer
February 27, 2012
Kay Bell has some good thoughts on how to deal with your tax preparer. I like this especially:
Be honest: Denial might be the biggest state in America, but it will kill you at tax time. And your tax pro will have to fight murderous impulses, too, if you lie about a tax situation. Yes, you as the taxpayer signing your 1040 are the person ultimately responsible for what's on the forms and schedules, but your tax pro's reputation is at stake, too, not to mention the time spent on a return that will cause problems because you didn't provide accurate information.
I'd add one thing: don't be cagey with your tax pro. I've seen taxpayers try to guess what they "should" tell us to get the "best" answer to a question. That makes as much sense as trying to manipulate your doctor into giving the "right" diagnosis.
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We'll put you prison if you sell that, but we'll tax it at a $65 million value
February 24, 2012
When Joseph Heller wrote Catch 22, he didn't realize he was also writing the manual for IRS estate tax examinations. Janet Novack tells the bewildering story of modern art dealer Ileana Sonnabend and the most famous piece that she owned when she died in 2007:
As I report in a story here that appears in the March 12th issue of Forbes, Sonnabend’s heirs sold off works by Jeff Koons, Roy Lichtenstein, Andy Warhol and Cy Twombly to pay estate taxes of $331 million to Uncle Sam and $140 million to New York State. But they couldn’t even consider selling what might have been the most famous piece in her collection — “Canyon” by Robert Rauschenberg— because the collage contains a stuffed bald eagle and selling it would be a criminal offense, punishable by a year in federal pen.Given that restriction, the Sonnabend estate tax return (and three different appraisers the estate hired) valued the work at $0. The IRS says it is worth $65 million and is demanding an additional $29 million in tax and an $11.7 million “gross valuation misstatement” penalty from the estate.
Three appraisers say it's worthless, but the IRS still wants valuation penalties. Apparently the executors are expected to risk a year in prison to find a willing buyer, who would also presumably do time - and possibly lose the work under criminal forfeiture statutes. It's good to know we can count on the IRS to be reasonable.
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Icy roads Cavalcade!
February 24, 2012
The new Cavalcade of Risk is up!
Insurance Regulatory Law hosts this roundup of insurance and risk management posts -- not least of which is Insureblog's contribution on finding out if a deceased has life insurance. So manage your risk by getting off the road and checking out the Cavalcade!
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First they came for the Commissioner Muskrats, but we said nothing
February 24, 2012
"Commissioner Beavers Indicted on Federal Tax Charges"
Taxdood has more.
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Who knew they manufactured anchors in Iowa?
February 23, 2012
The supergeniuses in the "Economic Growth/Rebuild Iowa" Committee have found a sector of the Iowa economy that actually pays Iowa's corporation income tax. It's the highest corporation tax in the country, so it's grievous to those few who actually have to pay it -- so they want to do something about it.
No, they aren't repealing Iowa's futile and awful corporation tax. They are building in yet another tax break: a convoluted adjustment to income for "certified suppliers to anchor manufacturers." (HSB 604) Apparently the single-factor apportionment -- allocating income to Iowa based on the destination of items you sell -- doesn't do much good for Iowans who sell to other Iowa manufacturers.
It would work like this:
The supplier gets a certificate from a customer saying the customer is an "anchor manufacturer," which means an Iowa manufacturer that sells at least half of its production out of state.
Then, if the taxpayer
-has at least ten percent of its payroll, or alternatively 100 employees, located in Iowa, and
-it "agrees to annually provide to the authority information and data on jobs created and capital investments made in the state by the business,"
It will get to reduce its Iowa taxable income by the amount that it exceeds 110% of its prior year income apportioned to Iowa.
In other words, it would cap annual income tax increases for the taxpayers qualifying for this break at 10%.
There is so much wrong with this bill and the thinking behind it.
The legislators apparently think they can fine tune an already byzantine tax law to help a favored constituency to cure an otherwise punitive income tax. They act as if they knew that helping the taxpayers that qualify -- and nobody else -- is the key to a healthy economy. They act as though manufacturers are uniquely burdened by Iowa's corporation tax, when it's at least as awful for every business subject to it. They act as though a manufacturer that sells outside of Iowa deserves more support than somebody who sells stuff we want to buy.
The reporting requirement is clearly designed to enable the politicians to crow about the jobs they "create" with this thing.
Searching a comprehensive 50-state technical service on state taxes reveals no other "anchor manufacturer" break. A search for the euphemism of "supply chain incentive" in various forms generates nothing. This appears to be an Iowa-only brainstorm.
If they really wanted to do something for Iowa's economy, they'd get rid of the Iowa corporation tax -- a minor part of Iowa's tax revenue, but a major source of complexity and administrative expense. They'd get rid of Iowa's rats nest of special interest credits and deductions and use the savings to lower tax rates. They'd enact something like the Quick and Dirty Iowa Tax Reform.
Image credit: Flickr image courtesy Stew Dean under Creative Commons license.
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Eight years or Eighty, the IRS still wants its money
February 23, 2012
Jeffrey Sykes' victims may have gotten grim satisfaction yesterday when he received an 8-year sentence for stealing withheld taxes from his payroll service. Still, grim satisfaction doesn't help them get right with the IRS.
Mr. Sykes' payroll tax service had about 1,100 clients, according to reports. Instead of using client money to pay their payroll tax obligations, he apparently spent it on a more important obligation: himself.
Unfortunately, the IRS still wants the money. The victims get to pay their payroll taxes twice: first to Mr. Sykes, and then to the tax man. That's why employers should sign up with the Electronic Federal Tax Payment Service. Even if you outsource your payroll, EFTPS lets you go online to make sure that your provider is remitting your tax deposits on time. These online visits should be part of your internal control routine, because nobody can really afford to pay payroll taxes twice.
Prior coverage: Payroll outsourcing: trust (a little), but verify (a lot).
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What are you supposed to do with that 1099-K?
February 23, 2012
Jason Dinesen has some thoughts.
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Of course they did
February 23, 2012
To the surprise of no one but the politicians.
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So what is the right S corporation salary?
February 22, 2012
By affirming yesterday that a West Des Moines CPA had to pay FICA taxes on about $91,000 of his earnings from his professional S corporation -- instead of the $24,000 he put on his W-2 -- the Eighth Circuit helped make the first marks in the big unmapped area of how much compensation S corporations must pay their employee owners.
Income reported on an S corporation K-1 isn't subject to FICA and Medicare taxes. This tempts S corporation owner-employees to skip the W-2 and take out all of their earnings as S corporation distributions. The IRS naturally doesn't like that, and they have been successful for some time in attacking S corporations paying zero salary.
The case decided yesterday made a bold challenge to the IRS position. Rather than taking a zero salary, the S corporation shareholder took a $24,000 salary, with the rest of his $200,000 or so earnings from his practice coming out as S corporation distributions. This avoided the 12.4% combined FICA tax and the 2.9% Medicare tax on the difference. The taxpayer argued the $24,000 was all the salary he intended to pay, and that the IRS had no authority in the tax law to upset this intent.
The appeals court declined to accept the taxpayer's stated intent as decisive:
However, even if intent does control, after evaluating all the evidence, the district court specifically found "Watson's assertion that DEWPC 'intended' to pay Watson a mere $24,000 in compensation for the tax years 2002 and 2003 to be less than credible." We will not disturb this finding on appeal.
So $24,000 compensation for a CPA whose practice earns $200,000 isn't "reasonable," but, at least in this case, $91,000 is. What does that tell an S corporation owner trying to set his compensation?
Colorado CPA Anthony Nitti draws this conclusion:
The IRS is taking a formal, quantitative approach towards determining reasonable compensation, so to adequately advise our clients, we must be prepared to do the same thing.
The bottom line is that S corporation salaries must not be set too low in an attempt to avoid payroll taxes. The good news, however, is that “reasonable compensation” does not mean that all of the corporation’s earnings have to be in the form of wages.
Here's what I would keep in mind:
- If the shareholder is the only employee of the business, a bigger percentage of the earnings probably need to be compensation. The Eighth Circuit opinion says:
In this case, like Pediatric Surgical Assocs., P.C., non-shareholder employees also contributed to [his firm's] earnings. Thus, determining Watson's compensation is more complicated than if Watson had served as the only employee generating income...
-The less the business is dependent on the personal services of the owner, the greater the portion of income reportable in the K-1.
- Comparables matter. The Watson case determination of compensation rested largely on an expert determination of proper compensation, considering prevailing salaries in the industry. You probably don't want to hire consultants for every S corporation salary decision. A good place to start is looking at salaries within your organization. If your shareholder-employee is paid less than non-shareholders doing similar work, you are asking for trouble.
- Newt Gingrich and John Edwards get a little vindication. Commenters who insist that these exemplary husbands are also tax cheats for not taking all of their S corporation earnings as salary ignore the role of capital and other employees in the politician S corporations.
Links:
Eighth Circuit Decision
District Court Decision
Related:
Eighth Circuit upholds 'Watson' decision requiring increased comp for CPA S corporation shareholder
Court sets 'reasonable' comp for Iowa CPA S corporation shareholder
What do Newt and John Edwards have in common?
Also check out Anthony Nitti's in-depth article on the issue in The Tax Adviser.
UPDATE: The TaxProf has more.
UPDATE, 2/24: Rush Nigut, S Corporations and Setting a Reasonable Salary
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IRS releases Applicable Federal Rates (AFR) for March 2012
February 22, 2012
The IRS has issued (Rev. Rul. 2012-9) the minimum required interest rates for loans made in March 2012:
-Short Term (demand loans and loans with terms of up to 3 years): 0.19%
-Mid-Term (loans from 3-9 years): 1.08%
-Long-Term (over 9 years): 2.65%
Historical AFRs may be found here or from prior Tax Update posts.
The Long-term tax-exempt rate for Section 382 ownership changes in March 2012 is 3.47%.
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Happy Birthday, George! Too bad you didn't get that X-Box.
February 22, 2012
In honor of Washington's birthday, a rerun from a post from 2010.
Forbes Magazine reports that George Washington was the wealthiest President. For his day, the Father of the Country was incredibly wealthy, owning immense acreage in Virginia and on the frontier (largely in current Pennsylvania and Ohio), as well as a profitable and, for its day, state-of-the-art, farming operation.
Yet all of his wealth couldn't buy George:
- A car.
- A refrigerator
- An electric light
- Air conditioning
- Central heating
- A hot shower
- A computer
- A radio or television
- Medical care that today would have cured his fatal final illness.
- A telephone
- Vegetables out-of-season
- Even the crummiest dial-up internet connection
- An airplane ride
You get the idea. In so many ways almost everybody in the U.S. is vastly richer than even the wealthiest men of 210 years ago. While he might have been hugely wealthy for his day, he did without things even the poor take for granted in our country now.
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Eighth Circuit upholds 'Watson' decision requiring increased comp for CPA S corporation shareholder
February 21, 2012
The Eighth Circuit Court of Appeals has upheld the widely-discussed Iowa District Court opinion in Watson. The district court required an one-shareholder S corporation owning an interest in a CPA practice to pay employment taxes on about $90,000 of compensation, even though the S corporation issued the shareholder a W-2 for only $24,000. The partnership reported around $200,000 of K-1 income to the S corporation.
This is an extreme example of the so-called "John Edwards Shelter," where an owner pays less employment tax by earning income through an S corporation than might be paid if the business were reported through a partnership or a Schedule C. It shows that there are limits to how low courts will allow S corporation shareholders to set their compensation; it also stands for the case that a professional business doesn't have to pay 100% of its earnings as taxable compensation subject to FICA.
I'm tied up with work today, so I will follow up later when I can.
Links:
Eighth Circuit Decision
District Court Decision
Related Tax Update Coverage:
Court sets 'reasonable' comp for Iowa CPA S corporation shareholder
What do Newt and John Edwards have in common?
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The slightly-soiled half-dozen
February 21, 2012
The IRS has issued its annual list of the "Dirty dozen tax scams." TaxGrrrl has an excellent rundown on these bad ideas, including identity theft and the "zero wages" returns. But let's spare a moment to run down some naughty ideas that will never make the dirty dozen list:
- Filing a paper 1040 while deliberately putting one of the forms with a higher Attachment Sequence Number in front of one with a lower attachment sequence number.
- Putting the number for "Time and Temperature" in Australia where the 1040 asks for "daytime phone number."
- Writing Haiku in the unused lines for new Form 8949.
- When you see a line that says "see instructions," you just wing it.
- When your miscellaneous itemized deductions are eliminated by the 2% floor, you write "find the umbrella" in the detail line.
- You sign your e-file authorization in crayon.
Readers, do you have some more minor offenses against the tax gods?
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Make mine a double, put it on the rich guy's tab
February 21, 2012
Via the TaxProf, "Heritage Foundation: Chart of the Week -- Nearly Half of All Americans Don’t Pay Income Taxes:"
Click chart to enlarge.
Whenever you point this out, cries erupt -- "but they pay other taxes! Payroll Taxes! Buffett Rule!" Not all of them, and not as much as they used to. The 2 percentage point "temporary" decline in the employee FICA tax is, depending on whether you include the part that the employer pays, about a 30% or 15% decline in the payroll tax. The earned income credit reduces, and often eliminates, even the payroll tax for many of the bottom 50%. The rich are paying a bigger share of federal taxes here than anywhere else.
The federal government is insolvent. Either the spending will go down or taxes will go up for those who aren't paying taxes now. The rich guy isn't going to keep buying.
Related: Nope. Still doomed.
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IRS Commissioner Shulman: you obey the law. Me, that's different.
February 20, 2012
The IRS hasn't been known for sympathy for inadvertent violators of the foreign account reporting rules. Americans inheriting foreign property from distant relatives, young Americans who moved abroad to start a career, children born in the U.S. who have lived abroad since infancy -- all face stern wrath, and big fines, for not filing foreign financial account disclosures that they had no idea existed.
You would think that a Commissioner so stern about punishing foot-faults would be extra careful about obeying the rules itself, if he had a smidgen of shame or self-awareness. Apparently not.
Tax Analysts reports that IRS Commissioner Doug Shulman will simply ignore his statutory duty to respond to a Taxpayer Advocate Directive on abuses of offshore taxpayers in the Offshore Voluntary Disclosure program. From the story ($link):
IRS Commissioner Douglas Shulman has no plans to respond in writing to National Taxpayer Advocate Nina Olson's taxpayer advocate directive (TAD) on the IRS offshore voluntary disclosure program (OVDP) despite a statutory requirement that taxpayer advocate recommendations be responded to within 90 days, Olson said February 17.According to Olson, who spoke at the Individual and Family Taxation session of the American Bar Association Section of Taxation meeting in San Diego, Shulman told her that section 7803(c), which requires the commissioner to formally respond to any taxpayer advocate recommendation within three months of its submission, applies only to the taxpayer advocate's annual report and not to recommendations made through TADs or taxpayer assistance orders (TAOs).
How convenient for him. Let's see what Section 7803(c) says:
(3) Responsibilities of CommissionerThe Commissioner shall establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within 3 months after submission to the Commissioner.
That's "all recommendations." Not "all recommendations submitted in the annual report of the Taxpayer Advocate." Not "all recommendations under this Section." Just "all recommendations." If there was a 50% annual penalty assessed on the balance of the Commissioner's bank and retirement accounts for failing to respond on time -- the same penalty that he is gleefully assessing on offshore account non-reporters -- I bet he would have responded. After all, unlike the unwitting victims of the offshore compliance jaywalker hunt, it's clear the Commissioner is well aware of this requirement.
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Nope. Still doomed.
February 20, 2012
Congress just passed a bill to continue the 2 percentage-point reduction in employee Social Security tax through the end of the year. Meanwhile, the President and many pundits are obsessed with increasing taxes on "the rich," even though they won't and can't come close to paying for our incontinent government, especially entitlements like Social Security. The center-left Tax Policy Center has a new paper out that makes the point diplomatically:
While the changes enacted in the Budget Control Act have moved projected deficits in the right direction, these deficit reductions still exist only on paper, with the lack of action since the Act's passage leading one to question whether they will be sustained. Even if they are, the federal budget outlook is still unsustainable, primarily because of a rise in entitlement spending that is not accompanied by an increase in revenues. Under even the most optimistic scenario, the necessary adjustments must be several times the size of those adopted under the recent legislation.
In other words, the rich guy isn't buying this round. You are.
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IRS extends deadline for 'portability' election for 2011 deaths
February 20, 2012
You can't file joint estate tax returns, for reasons that are obvious on a moment's reflection. Because each spouse gets a lifetime exemption from estate tax, couples with estates over the exemption amount have tried to make sure each spouse has enough assets to use their exemption.
The estate tax enacted for 2011-2012 makes life simpler for these couples by allowing estates to elect to carry any unused exemption to the surviving spouse. You make the election on the dead spouses estate tax return.
That's great, but what if you don't realize you need the exemption. It's easy to imagine situations where a surviving spouse comes into a fortune and really wishes she had filed that Form 706. It's just as easy imagining a lawsuit against the executor who had only the deceased's double-wide to probate from the surviving spouse who wins the Powerball.
The trap is still there, but the IRS last week gave estates extra time to avoid it, even if they didn't extend their estate tax return. From the TaxProf: IRS Extends Deadline to File Estate Tax Portability Election
Link: IR-2012-24
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Isn't my tax-exempt organization exempt from paying Iowa sales taxes?
February 20, 2012
Not so. Chris James explains at the Davis Law Firm TaxIawiowa blog.
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Rick Santorum makes Obama-esque tax planning move
February 17, 2012
Presidential Candidate Rick Santorum released his tax returns this week. Since he isn't paying me, I'm not going to spend a lot of time on them, but a cursory review indicates that he is leaving some tax money on the kitchen table he supposedly sits at when he prepares his 1040.
SEP contribution. It looks like Mr. Santorum is making the same mistake President Obama used to make -- failing to use a SEP to shelter some of his Schedule C income for his retirement. Based on his schedule Cs, he could have started a SEP retirement plan and sheltered up to $45,000 in 2007, 46,000 in 2008, and $49,000 in 2009 and 2010. At a 35% marginal rate, that would have saved him $66,500 off his federal tax bills. With seven kids, he could use it. Based on his minimal interest and dividend income, he's not saving much in taxable accounts.
Schedule C vs. S corporation The Santorum tax returns show six figure salary income and Schedule C self-employment income ranging from $276,000 to $786,000. He should at least consider whether he could earn some of this in an S corporation and save the 2.9% medicare tax on amounts in excess of a reasonable salary.
Home mortgage interest. Either the Santorums should have refinanced much earlier, or they may have deducted too much home mortgage interest in 2007-2009. The tax law only allows you to deduct interest on up to $1.1 million of house debt. The average 30-year mortgage rates from freddiemac.com, the amount of interest that would be on $1.1 million, and the Santorum deductions, are:
2007: 6.34%; $69,740; $68,821
2008 6.03%; $66,330; $77,250
2009 5.04%; $55,440; $70,898
2010 4.69%; $51,590; $43,493
The puzzling thing is the increase in the deduction from 2007 to 2008. If he got a new house, you would expect a refinancing would bring the mortgage to prevailing rates. He also could have bought a new house in 2007, which would have had the full load of interest for less than a year. It does look like he finally got his mortgage rate under control in 2010.
Contributions. My friend Caleb says the Santorums are cheap in their contributions, with annual donations of from $9,315 to $29,773. That's not unusual, in my experience, for that level of income, if well short of tithing. But if the Santorums, with seven kids, are cheap in their giving, what does that make their fellow Catholics, the Bidens, who showed all of $595 in charitable gifts in 2007, $1,335 in 2008, $3,920 in 2009 and a whopping $4,400 in 2010 (and no, I don't count the deductions the Bidens claim for used clothing given to Goodwill).
Santorum returns: 2007 2008 2009 2010
Other Tax Update candidate return coverage:
Mitt Romney
Newt Gingrich
Barack Obama
Other coverage:
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Payroll tax extension looks like a done deal
February 17, 2012
Congressional leaders appear to have reached agreement to extend the 2 percentage-point reduction in the employee FICA and Self-employment tax rate through December 31. It had been slated to expire at month end. The agreement had been hung up on how it would be paid for, but our leaders bravely compromised by not bothering to pay for it.
More coverage:
Anthony Nitti
Christopher Bergin
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Still no tax fairy
February 17, 2012
There is no tax fairy, or tax lady, to get you out of your taxes at pennies on the dollar. Find out why at my new post at IowaBiz.com, the Des Moines Business Record group blog for entrepreneurs.
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Incentives to stay poor
February 16, 2012
The state legislature seems to be racing to increase Iowa's earned income tax credit as part of an emerging grand bargain to lower commercial property taxes. The Iowa Senate has passed a bill to increase the refundable credit to 20% of the federal credit by 2014. It currently is 7% of the federal credit.
While the legislation may be well-intended, it worsens a perverse side effect of the EITC: it increases the penalty for the working poor to improve their lot. The EITC phases out as income increases. When you take the phase-out into account, the marginal tax rate -- the effective rate on each additional dollar of income earned -- goes through the roof.
Using a standard income tax projection software, I figured the marginal tax rate of a single taxpayer with three children and self-employment income. I used self-employment income to capture the payroll tax effects of additional earnings that are hidden for wage earners. The results are charted below:
Click to enlarge
The federal marginal tax rate reaches 48%. The Iowa marginal rate rises as high as 10.04%. Considering the highest federal and Iowa regular tax rates for high-income earners are 35% and 8.98%, that's a real handicap on the working poor trying to improve their lot. It 's a big unintended incentive to the poor to keep their income low.
The situation gets even worse if you take into account other means-tested welfare benefits. The loss of these benefits can cause marginal tax rates for the working poor to exceed 100%.
It would be nice if the legislature would consider the disincentives they create for emerging from poverty. Unfortunately, giving away money is enough for them to campaign on.
Related: Can you cut taxes for people who don't pay taxes?
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It doesn't work in California, so let's do it everywhere!
February 16, 2012
Russ Fox notes how California's regulation of tax preparers -- a program that preceded the current IRS effort -- has somehow failed to prevent regulated California preparers from engaging in tax crime. Not even the mandatory California CPE did the trick.
That didn't stop the IRS from this puffery in announcing its piece of the President's budget proposals:
Return Preparer InitiativeThe FY 2013 budget request includes $35 million to strengthen return preparer compliance. One of the most important initiatives that the IRS has undertaken in recent years is the Return Preparer Initiative, the foundation of which is mandatory registration for all paid tax return preparers. In addition, the IRS is developing requirements to establish mandatory competency testing and continuing education for preparers to ensure that taxpayers are hiring preparers who have a minimum level of competency and adhere to professional standards. This initiative is core to the IRS’ tax gap strategy and will increase government revenue, and support high-priority, preparer-related enforcement activities.
If this is "core to the strategy," the strategy is doomed. The "tax gap" is not the result of lack of compentency and CPE on the part of preparers. The real culprits are the underground cash economy and a tax law that makes compliance by law-abiding taxpayers difficult, frustrating and expensive while inviting fraud through refundable credits. Fighting these problems by harassing law-abiding tax preparers is like fighting an arsonist by regulating backyard grills.
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Saddle up for the Carnival!
February 16, 2012
Kay from Texas has rounded up the best in tax blog posts this side of the Pecos, so put on your cowboy hat and mosey on over to the new Carnival of Taxes!
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Why Valentines Day isn't on April 15
February 16, 2012
My new post at Going Concern.
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Just put it on the tab
February 15, 2012
It looks like Congress has come up with a miraculous solution to financing the 2 percentage-point reduction in the employee FICA tax for the rest of the year: spend money they don't have. Howard Gleckman of TaxVox reports:
On Monday, the House Republican leadership announced it would support a 10-month extension without offsetting spending cuts. Problem solved. Just put another $100 billion on the tab.This wouldn’t bother me if I thought the payroll tax cut was really going to expire in 10 months. But I don’t. Given the Democrats’ politically successful claim that allowing the tax break to expire was akin to a tax increase, it is hard to imagine them abandoning the provision–or the issue– anytime soon.
And if Congress can’t agree on how to pay for it now, how will it do so at the end of the year?
We know one thing: the rich guy isn't buying.
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Is now the time to dump overdue FBARs on the IRS?
February 15, 2012
Maybe. Phil Hodgen passes on a report that the Detroit center that processes foreign financial account disclosures is behind in processing "millions" of the forms. Phil ponders the pros and cons:
This tells me that if you are a normal person with unfiled FBARs, now is the time to dump them into the system. Your delinquent filings will be compared against the cohort of other filings entering into the system. In your favor you have IRS overload and you have a very large bell curve distribution of taxpayers.The hard decision is to guess how you look compared to the expected pool of filers. Among those "millions of documents" what will yours look like? You hope that the IRS behaves like Foghorn J. Leghorn. The person who opens your envelope merely glances at your FBARs, and snaps "Go, I say, go away, boy. Ya bother me." (Sound file)
That decision is where you need to talk to someone smart and experienced.
Good advice. Just hope the IRS clerks aren't feeling all Clint Eastwood, rather than Foghorn Leghorn.
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Is your whole federal refund taxable in Iowa?
February 15, 2012
Perhaps not, especially if you qualify for the "Making Work Pay" tax credit or other refundable credits. Jason Dinesen explains.
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Budgeteering
February 14, 2012
The President's new budget is out. It's not worth a lot of busy season time, as very little of it will be enacted (thank goodness). And really, this budget is to "budgeting" what a Ghirardelli's catalogue is to dieting. The TaxProf has a good roundup if you want the details, but Veronique De Rugy tells you all you really need to know about the tax proposals:
Remember in the president’s State of the Union address how the line “no more bailouts, no more cop outs” was followed by proposals to do more bailouts? Well, President Obama continues this practice. His budget message derides “special-interest loopholes,” but then proceeds to provide more special-interest loopholes.For instance, in addition to the tax credits that already exist in the budget, the president proposes 7 tax credits or cuts for families and individuals (such as an exclusion for student-loan forgiveness after 25 years of income-based or income-contingent repayment), 5 protectionist tax incentives (for expanding manufacturing and insourcing jobs, such as a new “manufacturing communities” tax credit), and 6 tax-relief provisions or investments to create jobs and jump-start growth (inlcuding 3 new ones, such as a 10 percent tax credit for new jobs and wages, and a tax credit for energy-efficient commercial buildings).
And then there are the tax credits for medium- and heavy-duty commercial vehicles that use alternative fuels, the energy incentives, the new-market tax credit, the designated growth zones, the tax-exempt bonds for Indian tribal governments, and much more.
And they call this "tax reform." If that's tax reform, CPA April 15 parties are "sobriety."
Related: What's the opposite of tax reform?
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How not to document your business travel
February 14, 2012
The tax law has very specific requirements you must meet before you can deduct your business travel. A Tax Court case yesterday shows how not to meet them:
Mr. Lysford's entries in his spiral notebooks are wholly inadequate. They merely list the date and destination of airplane and automobile trips. No business purpose for the trips, no names of clients visited, and no description of business scheduled, conducted, or attempted is provided. A list of dates representing Mr. Lysford's airplane and automobile trips with no identification of the people visited, the locations visited, the nature or purpose of the trips, or the business actually conducted falls well short of the substantiation required by section 274(d)
Flickr image courtesy jxandreani under Creative Commons license
Time and place, amount, persons met and business relationship, and business purpose: if you can't show these for your travel costs, Section 274 says you lose.
Cite: Lysford, T.C. Memo 2012-14.
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Wrong.
February 14, 2012
Peter Pappas: "Why You Should Never Let a History Major Opine about Taxes"
I got my History major (Cornell College, '82) before I got my accounting graduate degree. I hope that doesn't mean I have to take down my 7,600-odd posts dating back to November 2001.
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When you paint a target on your back, don't run out on the shooting range
February 14, 2012
A Colorado man who helped push through that state's bill of rights was sentenced yesterday to 180 days in jail and six years of probation on tax charges. He was accused of using a sham charity to hide income. He says he's the victim of a political prosecution. From The Washington Post:
Douglas Bruce, a former Colorado lawmaker, said state officials went after him for promoting smaller government. He vowed to appeal."This is not the end. This is just — what do they call? — a strange interlude," Bruce said. He was ordered to report to jail Friday.
Mr. Bruce acted as his own lawyer, never a good idea. In general, if you are going to be an anti-tax advocate, it's wise to keep your tax life in good order.
TaxDood has more.
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How could I disagree with this?
February 14, 2012
David Brunori at Tax.com (my emphasis):
My friends at Roth & Company – the preeminent CPA firm in Iowa – posted a chart on their Tax Update Blog showing which states tax groceries. Actually the chart is from the Tax Foundation
David is evidently a clear-eyed and astute man.
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Bringing preparers up to IRS standards
February 13, 2012
The IRS reminds unenrolled preparers that they need to start getting 15 hours of CPE per year to keep their return preparer privileges. This token CPE requirement is part of Commissioner Shulman's brazen power grab tireless efforts to ensure the integrity of the tax preparation process.
Thomas W. Richardson was sentenced Thursday by U.S. District Judge Jane J. Boyle in Dallas to 105 months in prison and ordered to pay $30,649 in restitution, following his guilty plea in August 2011 to one count of theft of government property and one count of aggravated identity theft, the Justice Department announced today. Judge Boyle ordered that Richardson surrender to the Bureau of Prisons on March 6, 2012. According to an order filed that set conditions for his release, Richardson is a resident of Mansfield, Tex.In handing down the sentence, Judge Boyle commented that Richardson was a former IRS employee who used his inside knowledge of IRS operations to commit his crime.
According to the factual resume filed in the case, Richardson admitted that within a two-day period, April 15, 2006 to April 17, 2006, he filed or caused to be filed 29 fraudulent 2005 individual income tax returns. Each federal income tax return claimed a refund of between $215,801 and $473,832. Richardson admitted that the refunds claimed by all 29 tax returns totaled $7,922,657.
I'm sure none of that would have happened if he had a PTIN and 15 hours of CPE.
Related: Preparer regulation: prepare for a mess.
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The best way to fix it is to kill it
February 13, 2012
A North Carolina tax professor gets the Section 409A deferred compensation rules:
This [article] ... describes the legislative calamity that is § 409A of the Internal Revenue Code. Section 409A manages, all at once, to (i) fail to better neutralize the tax treatment of deferred compensation with that of current compensation, (ii) impose significant compliance costs on sophisticated taxpayers, and (iii) provide a dangerous trap for unsophisticated taxpayers.Ideally, Congress should repeal § 409A and replace it with a system that taxes deferred compensation more neutrally vis-a-vis current compensation. Failing that, Congress should either replace § 409A with a broad grant of authority to the Treasury and IRS to strengthen the constructive receipt and economic benefit doctrines or amend § 409A to limit its scope to employee compensation paid by public companies.
It's a legislative calamity, all right, and one that nobody in Congress seems to have any interest in fixing.
Related: 409A: the worst single tax provision of the Bush era
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LIfe before Form 720
February 13, 2012
If you feel you have overpaid your excise taxes nowadays, you claim a refund on Form 720. In Andrew Jackson's day, they apparently hadn't invented that form:
The future president was petitioning Congress to get a refund of the whiskey excise tax after his stills burned down. It didn't work.
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'Buffett Rule' rates are already here
February 10, 2012
The Tax Policy Center, a non-partisan think tank on the center-left, has issued a wonderful little paper that cuts through much nonsense on the progressivity of federal taxes.
The Obama administration is embracing a "Buffett rule" tax, a sort of alternative alternative minimum tax of 30% on AGI over $1 million, so that everybody will pay as high a rate as Warren Buffett's secretary allegedly does. Of course this ignores the tax that is paid on corporate income before it is distributed or realized as capital gains. The Tax Policy Center has looked at real rates on cash income when all federal taxes -- payroll, corporate, income and estate taxes -- are accounted for. On that basis, the "Buffett Rule" rates are already in place:
Source: Tax Policy Center. Full chart available here.
Not only are Buffett Rule rates in place, but the federal tax burden is already extremely progressive -- more so than in Europe, where the tax system is much more dependent on regressive consumption taxes like value-added taxes.
Of course the demagogues will still promise more free federal cheese, paid for by the rich guy. Just remember, the rich guy has already gotten his bill; when taxes go up to pay for our incontinent government, they'll go up for you, too.
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1099-K rules become slightly less insane
February 10, 2012
The IRS has finally realized what has been obvious to everyone else: it would be insane to require businesses to reconcile their gross receipts to the 1099-Ks issued by credit card companies. Imagine a grocery chain -- let alone somebody like Walmart -- trying to tie out their gross receipts to their 1099-Ks.
The real use of the 1099-Ks will be to identify people in the eBay/Amazon economy who aren't reporting their income, though it will probably also help to smoke out, say, restaurant owners or gas station operators who are cooking their books. Even then it will be a crude tool to identify egregious violators -- not a way to to tie out income precisely. The idea of tying out gross receipts with 1099-Ks like you tile out an individual's interest income to their 1099-INTs never made any sense.
More coverage:
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Branstad to embrace EITC boost to pass property tax reform?
February 10, 2012
That's the way it's looking. O. Kay Henderson reports:
What Branstad envisions is a larger tax deal that would include reducing commercial property taxes.“I’m willing to consider the Earned Income Tax Credit (increase) as part of an overall tax reform package,” Branstad says.
Branstad talked about the possibility of such a deal Friday during an appearance on Iowa Public Television.
Related: Can you cut taxes for people who don't pay taxes?
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Steamy Cavalcade!
February 10, 2012
The cold weather may be dragging on, so fire up the boiler and steam on down to the 150th edition of the Cavalcade of Risk, hosted by My Wealth Builder.
This edition of the blog world's roundup of insurance and risk management includes, among other gems, Hank Stern on the menace, or not, of earbuds. Check it out!
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Deduction for donation of house to fire department goes up in flames
February 09, 2012
Dreams of a big deduction for letting the local fire department burn down a "tear down" resort house to clear the way for the new vacation mansion went up in flames yesterday. The Seventh Circuit Court of Appeals upheld a Tax Court decision holding that the fire department gets a lot less than the fair value of a house when you let them burn one down.
You usually get a fair market value deduction for a charitable donation of long-term capital gain property, assuming the tax law appraisal requirements are met. But when you let the fire department burn down a house, you aren't really giving them the house. If you were, they could keep it as a clubhouse or something, or sell it to a third party for cash. They only get the right to burn it -- perhaps a right of value to a recreational arsonist, but probably not as valuable as an undamaged house. As the court put it:
When a gift is made with conditions, the conditions must be taken into account in determining the fair market value of the donated property. As we explain below, proper consideration of the economic effect of the condition that the house be destroyed reduces the fair market value of the gift so much that no net value is ever likely to be available for a deduction, and certainly not here.
Flickr image courtesy dvs under Creative Commons license
The TaxProf has more.
Cite: Rolfs, No. 11-2078 (7th Cir. Feb. 8, 2012)
Prior Tax Update Coverage: What if you are donating it to an arson awareness organization?
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Cracking the Sentencing Guidelines
February 09, 2012
The author of "Cracking the Code," which argues that he has figured out how to get out of paying income taxes, had his tax conviction upheld yesterday by the Sixth Circuit Court of Appeals. He did, however, get the case sent back for resentencing, as the court said the court improperly imposed an "enhancement" of his sentence for obstruction of justice. So he's cracked that, anyway.
Related: Cracking the Code, or smoking the crack?
Cite: USA v. Hendrickson, CA-6, 10-1726
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Subsidize them and they will take it
February 09, 2012
Iowa's disastrous experience with film subsidies hasn't quite cured the legislature of its starry eyes. An Iowa Senate Subcomittee yesterday approved a bill (SF 2110) to let the owners of the "Field of Dreams" site keep sales taxes collected there for themselves to help finance their project. A similar subsidy benefits the NASCAR speedway in Newton.
Of course this facility, if built, will compete with other businesses seeking tourist dollars and providing entertainment. They will have to collect sales taxes from their customers to provide the services received by the Field of Dreams. The legislature can never make a convincing case that this development is so special that it deserves this break. Don't assume that will stop them.
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What states can tax your Google Ads revenue?
February 09, 2012
Brian Strahle addresses the mysterious world of state taxes on internet advertising revenue:
The Internet takes sourcing advertising revenue to a whole new (complicated) level. In addition, most states have NOT addressed this issue. The few that have, have reached different conclusions.
Don't assume these conclusions will be helpful.
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Legislating to the headlines: S corporations and stock options
February 08, 2012
There are many reasons the tax law is as awful as it is, but one reason is too often overlooked: the way Congress writes laws to respond to headlines. Two current examples show how this works.
S corporation compensation. Lots of congresscritters remember Newt Gingrich unfondly. When it came out that he used an S corporation, and therefore paid less employment tax than the critters in their infinite wisdom thought appropriate in hindsight, they proposed a new bill, reports Linda Beale. Actually, they've repropoposed an old bill -- the worst of two bills proposed in 2010 to fight the same "abuse." The bill would treat S corporation distributions as subject to payroll taxes if 50% or more of a firm's value was due to the "reputation and skill" of three or fewer owners. As we noted the first time this came around, this bill would punish the smallest service providers (not me! We have ten shareholders) and create horrendous valuation problems. Let's hope it dies again.
Stock Options. The second example is a new proposal to limit the deduction for stock option compensation expense (via Going Concern). When an employee exercises a typical stock option, the employee has taxable income to the extent the value of the option exceeds the option price; the corporation has a deduction for the same amount. Because the Facebook IPO will reportedly wipe out the company's taxable income, congresscritters want to delay such deductions. Never mind that the deduction on one side triggers just as much income on the employee side, plus payroll taxes. Never mind that it creates complexity and disturbs a useful simplicity and symmetry. Something must be done!
While the current legislative gridlock may mercifully stop these bad ideas for now, some of the most dreadful parts of the tax law came about as responses to headlines. Examples that come to mind:
- Section 409A deferred compensation rules. These brutal and horrendously complex rules make deferred compensation plans difficult, dangerous and expensive for everyone because Congress thought Ken Lay did bad things.
- The $1 million limit on executive cash compensation -- which did much to encourage the option-based compensation plans that the critters suddenly find distasteful.
- The disastrous, fraud-ridden and futile First-time Homebuyers Credit was a headline-driven response to the collapse in housing prices.
- The absurd alternative minimum tax itself was born in response to headlines about rich people avoiding taxes.
Not every problem is a tax problem. Not every result a congresscritter dislikes is a problem. And when there is a tax problem, not every bill is the solution.
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Just heading to the Chennai Walgreens, Marshal!
February 08, 2012
The defrocked CPA recently sentenced to 37 months in federal prison for tax crimes involving a bunch of North Platte, Nebraska medical professionals will start his sentence earlier than planned. Lowell Baisden was given 120 days to arrange care for his elderly mother before reporting to prison; now he has been arrested for attempting to travel to India, reports the North Platte Bulletin:
U.S. District Judge Richard Kopf allowed him 120 days to report. Baisden said he needed to help his ailing mother.He was prohibited from trying to leave the country.
Baisden was in the custody of U.S. Marshals Monday, who are delivering him directly to the Bureau of Prisons, according to a court order that Kopf issued Tuesday.
Baisden is from Bakersfield, Calif. Before the latest arrest, he was destined for a low-to-medium security prison camp in Lompoc, Calif., 175 miles northwest of Los Angeles and next to Vandenberg Air Force Base.
Related: Plea deal on the Platte
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Sales tax shopping list
February 08, 2012
This week the Tax Policy Blog weekly map shows which states exempt groceries.
The moral? Have your income taxed in Sioux Falls, but buy your groceries in Sioux City.
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Two months not enough time for Congress to get smarter
February 08, 2012
Congress foolishly extended the 2011 2 percentage-point FICA tax reduction only two months into 2012 because they couldn't figure out how to cut enough from the $2+trillion federal budget to pay for a full-year extension. They still can't, and the payroll tax may again expire, with all the compliance headaches that would entail. Kay Bell has the scoop.
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Can you cut taxes for people who don't pay taxes?
February 07, 2012
The Des Moines Register has this headline today:
Senate panel OKs $26 million tax cut for 260,000 lower-income Iowa families
The "tax cut" is actually a proposed increase in Iowa's earned income tax credit. The EITC is a "refundable" credit, which means that if it exceeds your computed taxes, Iowa will send you a check for the difference. For those people, it's really a welfare check.
Running numbers for a hypothetical single Iowan with three kids shows how it works on a 2011 return:
All the positive numbers are the net refunds received by the taxpayer in excess of all taxes paid, including payroll taxes, at the given level of earned income, assuming no other income or deduction items other than standard deductions. Whether or not increasing the EITC is good policy (it's a fraud magnet), it's at least as much a "benefit boost" as a "tax cut."
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Foreign account reporting when you are under the $10,000 FBAR limit
February 07, 2012
Even if your foreign bank account never reached $10,000, you still have to tell the IRS about it. Russ Fox explains.
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Tax debt settlement outfit achieves pennies on the dollar!
February 07, 2012
Too bad that deal is for creditors, rather than for the hapless clients who paid cash up front to get J.K. Harris to negotiate away their tax debts with the IRS. If the clients are part of the unsecured creditors group, it's pennies on the dollars the hard way. J.K. Harris, known for late-night spots and back-section newspaper ads promising miraculous reductions in tax debts, apparently is entering Chapter 7 liquidation, reports the TaxProf (via Peter Pappas).
"J.K. Harris. They're almost like family to me."
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What if you don't have that W-2 yet?
February 07, 2012
You should have your W-2 from your employer by now. William Perez has some thoughts on what to do if it hasn't shown up yet.
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What's the opposite of tax reform?
February 06, 2012
Martin Sullivan at Tax Analysts loses hope that the Obama administration will attempt tax reform:
It wouldn't be so bad if Obama simply remained a lackadaisical supporter of tax reform. But his proposals are actually moving us in the opposite direction. As the election approaches, he and his advisers are feeling the need to dish out new tax breaks. So the president who on national television shouted at Congress to "get rid of the loopholes" now wants to add a bunch of new loopholes of his own.
Instead of cleaning up code and lowering rates, we see a batch of focus-group inspired tax breaks:
Just as with Clinton's parade of tax breaks, the growing list of Obama's special benefits includes features that are absurdly complex. The president wants to double the tax deduction currently available to manufacturing in the case of "advanced manufacturing technologies." It has been difficult enough to figure out how to differentiate manufacturing from other businesses under section 199. What in the world is "advanced manufacturing technology"? Are we talking about technologically advanced production processes or about technologically advanced products? If a product or production line includes advanced technology, is the entire product or production line eligible for the benefit, or just the components with the advanced technology features?The questions are endless. There will certainly be major disputes between the IRS and taxpayers. We can add a nice, new chapter to the book on everything we hate about tax law.
Unfortunately the tendency to make the tax law more difficult to enact pretty-sounding tax breaks isn't confined to Washington. While the President and the Governor of Iowa are from different parties, they both are proposing to jerry-rig new narrow breaks to an already byzantine tax law. In Iowa, ESOPs are the flavor of the month. And, of course, special tax breaks do more harm than good. From Mr. Sullivan:
Only in exceptional circumstances do violations of tax neutrality promote growth. Just because these tax breaks are well intentioned and targeted to sympathetic causes does not make them exceptional.
Iowa, with the nation's highest corporate rate and one of its most complicated tax laws, would do much better with simplicity and lower rates -- with the Quick and Dirty Iowa Tax Reform, for example.
Link to Tax Analysts content courtesy of their special arrangement with the TaxProf. Tax Notes subscribers can follow this link.
UPDATE, 2/8: Free link to Sullivan story at Tax.com.
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More fun than Farmville!
February 06, 2012
Anthony Nitti discusses how the Facebook IPO could be a windfall for California's tattered state budget, while Martin Sullivan at Tax.com complains that Facebook Founder Mark Zuckerberg isn't paying taxes at a high enough rate to suit Martin Sullivan because he isn't paying taxes on unrealized gains. Fine -- we should tax unrealized gains as soon as we can deduct unrealized losses and future expenses.
The TaxProf has more Facebook coverage. And remember to become a Tax Update fan at our Facebook page!
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Could you have a tax problem big enough to make you walk away from $14 million?
February 06, 2012
My newest post at Going Concern.
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ISU-CALT farm tax school schedule released
February 06, 2012
The Iowa State University Center for Agricultural Law and Taxation has released its schedule for the 2012 Farm Tax Schools. The biggest change for this year is that a school in Red Oak will replace the Griswold session, probably because of the rush-hour traffic problems in Griswold:
The schedule:
October 29-30: Mason City (North Iowa Area Community College)
November 7-8: Waterloo (Hawkeye Community College)
November 8-9: Denison (Boulders Conference Center)
November 12-13: Ottumwa (Bridge View Center)
November 19-20: Muscatine (Clarion Hotel)
November 27-28: Sheldon (Northwest Iowa Community College)
December 11-12: Red Oak (Red Coach Inn)
December 17-18: Ames (Quality Inn and Suites)
Watch for more details at the CALT site.
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Court orders eastern Iowa employer to pay those payroll taxes
February 03, 2012
It's never wise to fall behind on your payroll taxes. The IRS is stepping up the pressure on a Bettendorf businessman that it says owes payroll taxes. From a Justice Department press release:
A federal court has ordered James Watts and eight corporations to begin paying employment taxes to the United States on a timely basis, the Justice Department announced today. According to the government complaint in the case, Watts, of Bettendorf, Iowa, is the president of Watts Trucking Service, Inc., an Iowa corporation, of which the other seven corporations are subsidiaries. The complaint alleges that the companies fail to pay over to the Internal Revenue Service (IRS) all of their employment and unemployment taxes, including the income and social security taxes withheld from their employees’ wages....The injunction also prohibits the defendants from closing a waste-handling business and reopening it under a new name without the written consent of the government.
According to the complaint, Watts has formed and controlled at least 23 different business entities over the past two decades, most of which have accrued delinquent tax liabilities. The complaint states that the defendant corporations, along with 15 inactive entities, owe the government over $30 million in federal employment and unemployment taxes.
The penalties for not remitting payroll taxes build up quickly, and "responsible persons" can be held personally liable for payroll taxes not paid by their businesses. As I understand the injunction, the judge is saying that it appears the defendant is likely already behind on his taxes, and he isn't to dig any deeper.
Links:
Order on moion for preliminary injunction
Amended IRS complaint
Answer to amended complaint
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True in Washington, true in Des Moines
February 03, 2012
As Iowa rushes to pass yet another narrowly-targeted tax break, Iowa's legislators would be wise to ponder this from Roseanne Altshuler at TaxVox:
We seem to have forgotten that the fundamental purpose of our tax system is to raise revenue to fund government. The current system is riddled with tax provisions that favor one activity over another or provide targeted tax benefits to a limited number of taxpayers. Whether permanent or temporary, these provisions create complexity, impose enormous compliance costs, breed perceptions of unfairness, create opportunities to manipulate rules to avoid tax, and lead to an inefficient use of our economic resources. The tax code has become less stable, increasingly unpredictable, and more and more difficult for taxpayers to understand.
While she is talking about the federal income tax, it all applies just as much here in Iowa. But it is hoping for way too much to expect wisdom under the domes.
Related: The Quick and Dirty Iowa Tax Reform.
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Start me up
February 03, 2012
When you start a new business, you don't get to take business deductions until you begin operations. Expenses before you open the doors have to be capitalized and deducted after you get rolling. Bruce the Missouri Taxguy explains how this works.
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New Iowa ESOP break clears House committee
February 02, 2012
The Governor's proposed new break for ESOPs moved closer to passage yesterday when it cleared the House Ways and Means Committee. Like too many bad bills, it passed unanimously.
The bill, HF 2085, provides an exclusion on sales of stock to Employee Stock Ownership Plans if the corporation owns at least 30% of the company's stock after the transaction.
The key language of the bill:
(1) To the extent not already excluded, the net capital gain from the sale or exchange of employer securities of an Iowa corporation to a qualified Iowa employee stock ownership plan when, upon completion of the transaction, the qualified Iowa employee stock ownership plan owns at least thirty percent of all outstanding employer securities issued by the Iowa corporation.(2) For purposes of this paragraph:
(a) "Employer securities" means the same as defined in 1 section 409(l) of the Internal Revenue Code.
(b) "Iowa corporation" means a corporation whose commercial 3 domicile, as defined in section 422.32, is in this state.
Even if you think extra state breaks for ESOPs are a great idea (they aren't), this bill is a mess. It meshes badly with Federal Code Section 1042, which provides an elective deferral for sales to ESOPs owning 30% of the corporation stock if the proceeds are re-invested in public securities. The gain is deferred until the public securities are sold.
The way this bill is written, it may make people selling stock to ESOPs choose between a federal deferral of taxable income and a permanent state exclusion. Remember, the Iowa break only applies on a sale of "employer securities." The securities purchased when proceeds are re-invested under Section 1042 are not "employer securities," so the Iowa break will not apply when they are eventually sold. If language excluding the deferred Section 1042 gain is added to the bill (Iowa gain is normally the same as federal), it would require taxpayers taking advantage of the federal break to remember to reduce the gain on the eventual sale of the rollover securities for their Iowa returns.
So why are state ESOP breaks not a good idea? The ESOP rules are incredibly complicated, and for many closely-held S corporations, almost hopelessly so. A state break adds an additional layer of complexity to an already byzantine part of the tax law. It also makes the Iowa tax law even more complicated. It will do about as much good for the Iowa economy as a bill signed yesterday "RELATING TO FINANCIAL ASSISTANCE FOR PURPOSES OF THE BATTLESHIP IOWA."
We shouldn't be adding more small-beer tax breaks to an Iowa tax law already full of them. Like the Battleship Iowa, the Iowa income tax is obsolete. It's time to start over with a simple system with low rates -- something like the Quick and Dirty Iowa Tax Reform plan. Unlike this break, it could actually more than a token difference for the Iowa economy.
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Jaywalkers flee the gunfire
February 02, 2012
From Andrew Mitchel's International Tax Blog:
In 2011, the total number of expatriates was 1,781, a 16% increase from 2010. Last year had the highest number of expatriates since at least 2004 (when I started keeping these records), and perhaps the most in any year in U.S. history.According to the I.R.S., an estimated five to seven million U.S. citizens reside abroad. Many of these individuals have never lived in the U.S. and never expect to live in the U.S. However, these U.S. citizens must annually file U.S. tax returns.
For example, I spoke with a Canadian the other day who was born to two U.S. citizen parents in Canada. This individual therefore is a U.S. citizen. However, he has never lived in the U.S. and never expects to live in the U.S. Despite that he has never lived in the U.S., he will have to file U.S. tax returns for his entire working life.
The IRS hits people like these -- many of whom had no idea they were supposed to be filing -- with severe financial penalties. Meanwhile, it provides relatively cushy deals with actual criminals through its OVDI program, because you have to shoot the jaywalkers to really slap the wrists of the serious offenders. No wonder the jaywalkers don't want to play anymore.
Update: The TaxProf has more.
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The Jello defense
February 02, 2012
Going Concern has what looks like a real IRS notice; the format and typeface look right. The content is suspicious, though, because it is far too humane:
We have reviewed your correspondence regarding the penalties that were charged to your account and based on your explanation that "the adult brain turns to jello those first few months raising a baby" we have decided to remove all penalty charges. A total of $2,533.00 in penalty charges have been removed.
If authentic, the most likely cause of the original penalty would seem to be failure to attach a check to a balance-due 1040, or sending one that bounced. The notice is for a 2010 filing, and it's too early for the IRS to be sending matching notices for income items for that year. The penalty could also arise from a math error, though that seems less likely. But if the notice is authentic, it's reassuring that there are humans on the IRS processing campuses -- because we know the IRS computers are nowhere near advanced enough to have humor.
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The truth about the Tax Fairy
February 02, 2012
My new post at IowaBiz.com, the Des Moines Business Record group blog for entrepreneurs. A sample:
But if you make a lot of money and you want to continue to control and use it, you will eventually have to pay taxes. There is no special "de-tax" plan or double-secret pay-no-taxes-ever trust scheme that your preparer is just too lazy or ignorant to tell you about.
Good stuff every day at IowaBiz.com.
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We'll be fine as soon as all those things that will never happen happen
February 01, 2012
Deficit? What deficit? Just look at how the money will come rolling in if no changes are made in the tax law, according to the Congressional Budget Office:
Source: CBO, via the TaxProf. Click chart to enlarge.
What will it take for this money to come rolling in?
In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30%, mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the AMT, and the imposition of new taxes, fees, and penalties that are scheduled to go into effect. Revenues continue to rise relative to GDP after 2014 largely because increases in taxpayers’ real (inflation-adjusted) income are projected to push more of them into higher tax brackets and because more taxpayers become subject to the AMT.
So, all that will have to happen:
- The Bush-era tax rates that have continued through the Obama presidency will have to be allowed to expire.
- Congress will have to stop passing the AMT patches it has been enacting for at least ten years, bringing 20 million or more tax returns into the Alternative Minimum tax and increasing taxes by sometimes over $8,000 per household.
- Congress will have to stop passing the annual "extenders" it has been passing since the 1980s.
That's only three far-fetched things that will never happen. Let's spend it!
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IRS has fun new way to hit you with a $10,000 fine
February 01, 2012
The tax law's requirements for reporting foreign assets have expanded. If you are supposed to file new Form 8938, the IRS will send you a $10,000 bill. Chris James has the scoop at Tax Law Iowa.
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Dependent tiebreakers
February 01, 2012
Tax season is the time when modern families come together to fight over who gets the dependent deductions. William Perez has a useful post on the tax law's tiebreakers for determining who gets a deduction when the family can't settle it themselves.
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This is not a test
February 01, 2012
The new Cavalcade of Risk at The Notwithstanding Blog just looks like one -- but it really is full of the best new posts in insurance and risk-management from around the blog world.
You might not win a grape ape, but you're sure to learn something.
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The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to
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