The Advocate reiterates her longstanding recommendation that the government do more to protect taxpayers by regulating unenrolled federal tax return preparers, including by requiring initial testing and continuing professional education, and recommends that the IRS step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance.

The report has a critical unstated assumption: that such regulation would do more good than harm. Not bloody likely. The predictable unintended consequences:

- The supply of preparers would go down as folks will not want to screw around with the bureaucracy for what is for many just seasonal work.

- Unenrolled tax preparers will go underground, not signing returns. It is, after all, legal for folks to do their own returns (for now, anyway). These folks will be very difficult to track. A single mom trying to figure out her earned income credit in a housing project isn't going to lose sleep over whether the lady helping her with the paperwork in her apartment is licensed.

- Honest preparers will get caught up in paperwork mistakes of their own making, or made by the new IRS preparer bureaucracy, and will lose their seasonal income before the problems get ironed out.

- Resources that could be used to develop computerized enforcement tools to identify dishonest filing patterns will instead be used shuffling CPE paperwork and harassing preparers.

Finally, it is highly unlikely that all of this will result in a better product. We all remember when Fortune magazine would have a tax return preparered by different preparers and get as many results as preparers. The real reason for poor return prep quality is a poor quality of tax law. That root problem will exist until my modest reform proposal is finally adopted:

I have the answer to this problem, of course -- require that all Congresscritters do their returns in public themselves via a live webcast. They can use Turbotax or the software of their choice, as long as all input screens and output are broadcast live on the web, with a sidebar for running viewer commentary. Or, perhaps, selected tax pros could do the kibitzing - think "Mystery Science Theater 3000," tax geek version. Naturally, the whole comedy should also be available for playback on YouTube. I think this would have two useful results: Congresscritters would have a stake in tax simplification, and they would learn the difference between a deduction and a credit.

For a contrary view on the Taxpayer Advocate report, see Peter Pappas. Dan Meyer also has more.

And for those looking to take away a layer of bureaucracy, repealing the ordinance seems like an easy way to do that. The ordinance states that, "The room where dancing is conducted shall be illuminated to a minimum of two footcandles, as measured by a photometer at a plane 30 inches above the floor."

I suppose a strobe wouldn't count.

It's off to the credit counselor. He sits you down and lays it on the line: you need to make more money. Maybe knock off convenience stores, or something.

David Brunori is providing just that sort of insightful advice to broke states in his post States Should Raise Income Taxes to Solve their Budget Problems:

The CBPP says that raising income taxes on the wealthiest citizens can help close budget deficits. Indeed, the report says that raising the personal income tax 1 percentage point on households making more than $500,000 would raise a whopping $8 billion nationwide. The CBPP maintains that raising taxes on the really rich is less harmful to the economy than cutting services. The CBPP is right, of course. There's nothing unfair about closing budget deficits by enacting a little tax increase on a guy making $500,000. The people subject to the tax are making more than 99 percent of the population. Call me a big fat liberal, but using that extra tax revenue to support services for the unemployed family needing healthcare and education doesn't bother me one iota.

Because every dollar spent by the states is for unemployed families needing healthcare and education.

KCCI has harrowing video.

Our thoughts and prayers to the victim's family.

Nebraskans Paul and Alicia Garnett invested in LLCs and LLLPs that operated farming businesses in Iowa. The Garnetts claimed that they "materially participated" in the entities and deducted losses shown on the K-1s from the LLCs and LLLPs. The IRS assessed about $360,000 in deficiencies from these losses from 2000 to 2002, saying that the losses were passive no matter what. "Passive" losses are allowed only to the extent of "passive" income, or when the activity is sold.

The IRS applied Sec. 469(h)(2), which says:

Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.

The taxpayers argued that LLCs and LLLPs are not "limited partners" under these rules, and they are therefore subject to the regular "material participation" rules for determining whether a loss is passive. The Tax Court looked at the state law rules governing these entities to sort it out. The court found that Iowa law gives allows powers to LLC members and LLLP owners beyond those allowed traditional limited partners. They also said limited liability wasn't enough to make an owner a "limited partner" under Sec. 469(h)(2):

Thus, while limited liability was one characteristic of limited partners that Congress considered in the enactment of section 469(h)(2), it clearly was not, as respondent suggests, the sole or even determinative consideration. To the contrary, the more direct and germane consideration was the legislative belief that statutory constraints on a limited partner's ability to participate in the partnership's business justified a presumption that a limited partner generally does not materially participate and made further factual inquiry into the matter unnecessary.

We do not believe that this rationale properly extends to interests in L.L.P.s and L.L.C.s. As previously discussed, members of L.L.P.s and L.L.C.s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities' business. Accordingly, it cannot be presumed that they do not materially participate. Rather, it is necessary to examine the facts and circumstances to ascertain the nature and extent of their participation. That factual inquiry is appropriately made, we believe, pursuant to the general tests for material participation under section 469 and the regulations thereunder.

My view: This is a stupid argument for the IRS to make. When Sec. 469(h) was written, LLCs and LLLPs barely existed. The differences between these new entities and the old limited partnerships are profound, and it is common for LLC and LLLP members to work full time in roles analogous to general partners in limited partnerships. The new entities just aren't comparable to limited partnerships.

Just from the standpoint of the IRS, this is an unwise argument to make. If losses from these entities are per se passive, so is income. An IRS "victory" in this case could open up a world of opportunities for entrepreneurs, who would suddenly find they had lots of passive income from their LLCs that they could shelter with traditional tax shelter partnerships.

Yesterday's ruling doesn't close the case; it was a "summary judgment" motion on the 469(h)(2) issue. The IRS might still challenge the losses under the normal "material participation" standards.

Cite: Garnett, 132 T.C. No. 19.

Below: tax law standards for material participation

The regulations say you achieve "material participation" in non-real estate activities for a tax year if:

-You participate at least 500 hours; or
-You participate at least 100 hours and at least 500 hours in that and other "100 hour" activities; or
-You participate at least 100 hours and more than anybody else, or
-You are the only participant; or
-You materially participated in five of the past ten years )or in any three years for a service activity).

There is also a "facts and circumstances" test, but don't count on it.

A special rule apples to real estate. If you are not a "real estate professional," losses are normally passive no matter what, unless you provide "extraordinary" personal services.

If you are a "real estate" professional," you can apply the normal material participation rules to determine whether you have a passive activity. To be a real estate professional, you have to spend at least half your working hours - not less than 750 hours annually - in "real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade."

Mr. Brown said the lawyer wasn't willing to conduct the defense the way Mr. Brown directed. I wonder why? Maybe it has to do with this:

In court filings, the Browns say they are not the people named in the indictment. They sign their motions: “Edward-Lewis:Brown” and “Elaine-Alice:Brown.”

“We are not the EDWARD BROWN and ELAINE BROWN,” they wrote, saying if the court continues to deny their contention, “we will again be forced to retreat from this collusive and hostile arena.”

The funky punctuation defense has a poor record in federal courts.

The trial continues today.

The roundup of insurance and risk management blog posts includes an Insureblog must-read on the legal dangers employees may face running "health risk assessments" of their employees.

First and foremost, it appears that everyone on both sides agrees pretty much that registering and licensing currently "unenrolled" tax preparers (like myself) will do little, if anything, to cut down on fraudulent tax returns and unethical preparers.

Just as regulation of CPAs, lawyers, and doctors has not rid us of unethical members of these groups, regulation of tax preparers will not rid us of unethical tax preparers.

Alright then. It doesn't work, but we want to do it anyway. Maybe if I think about it long enough, it will make sense to me.

Today is the deadline for

As if to encourage the rest of us to file, the Justice Department last week announced a guilty plea for FBAR non-compliance by a client of Swiss bank UBS. The TaxProf has a roundup of coverage.

As this plea shows, offshore account secrecy seems to be crumbling. The IRS is offering an amnesty of sorts for those who haven't reported these accounts in the past, and it is very attractive compared to the consequences of getting caught for non-reporting. The amnesty runs through September 23, 2009.

The IRS has unilaterally extended today's deadline for new FBAR filers who have reported all of their foreign-source income but who did not know they had an FBAR filing obligation. Those taxpayers may file without penalty through September 23, but they need to follow special procedures.

If you are filing today, spend the extra four bucks or so and file Certified Mail, Return Receipt Requested. The IRS doesn't save the postmarks, so you need to.

Elmer Scheckel of Oelwein, Iowa decided to give the argument a try to get out of Iowa income taxes. It didn't go well:

The argument advanced by the Protester is merely a variation upon a claim that has been repeatedly considered and rejected by state and federal courts for decades. The 8th Circuit Court of Appeals and other federal appellate courts from around the country have decisively held that “wages are within the definition of income under the Internal Revenue Code and the Sixteenth Amendment, and are subject to taxation

The Moral: Wishing doesn't make it so.

Weasel arguments trying to square categorical pledges with political realities are dangerous. They encourage (more) voter cynicism and obstruct useful policy development. Better to simply acknowledge the reality. Which, after all, is not such an unpleasant one, at least for Democrats.

Which is why Axelrod's admission is welcome. It was also probably unavoidable -- trying to reconcile the health benefits tax with Obama's over-broad campaign promise was never going to fly. But it's still a step in the direction of political truth telling. Which is a refreshing change.

If welshing on campaign promises (less politely known as "lying") is refreshing, we've been well refreshed for lo these many years. What would really be refreshing is if politicians actually were honest before the election, while we could still do something about it.

UPDATE: And Flach takes another swing! UPDATE II: Pappas parries! And again!

Business exits Iowa over taxes

The money to subsidize Hollywood has to come from somewhere, but the state will learn that the non-subsidized chumps don't have to stay chumps. They can leave.

Related: IF TRUTH IN ADVERTISING APPLIED TO ECONOMIC DEVELOPMENT AGENCIES

Taxpayers who reported and paid tax on all their 2008 taxable income but only recently learned of their FBAR filing obligation and have insufficient time to gather the necessary information to complete the FBAR, should file the delinquent FBAR report according to the instructions and attach a statement explaining why the report is filed late.

Send a copy of the delinquent FBAR, together with a copy of the 2008 tax return, by September 23, 2009, to the Philadelphia Offshore Identification Unit, at the following address:

Internal Revenue Service
11501 Roosevelt Blvd.
South Bldg., Room 2002
Philadelphia, PA 19154
Attn: Charlie Judge, Offshore Unit, DP S-611

In this situation, the IRS will not impose a penalty for the failure to file the FBAR.

Additionally, if all 2008 taxable income with respect to a foreign financial account is timely reported and a United States person only recently learned they have a 2008 FBAR obligation and there is insufficient time to gather the necessary information to complete the FBAR, the United States person may follow the procedures set forth above and no penalty will be imposed.