Roth & Company, P.C. Tax Update Blog
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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Iowa's Capital Gain Deduction: your capital gains probably don't qualify
January 31, 2012
Taxpayers have for years been confused by Iowa's capital gain deduction. It's only available for certain business sales when the owner has held the business for at least ten years and has "materially participated" in it for that long. But until this year, there was no indication it was so hard on the face of Iowa's 1040.
The Iowa Department of Revenue last week released a protest resolution involving one such confused taxpayer (my emphasis):
The Department reviewed your 2006, 2007, and 2008 individual income tax returns and denied the capital gains deduction. The issue in this protest is whether your capital gains from investments, i.e., stock sales, dividends, and distributions reported on forms 1099-B and 1099-DIV qualify for the Iowa capital gains deduction.The Department’s review finds that the assessment was correct and your protest is hereby denied. Your position relies on the Department’s instructions for completing the tax return. We found that you are not the only one that made this mistake, so our instructions now clarify that these types of capital gains do not qualify for the deduction.
Here is how the 2010 IA 1040 listed the deduction (line 23):
Here it is on the new form:
The instructions now include a useful flow chart to help you figure out if you qualify for the exclusion. I would prefer "Deduction for gains on certain business and farm sales (see instructions)," but at least it's an improvement.
Far better would be a mandatory form for all returns claiming the deduction. The form would list the holding period of the asset and contain a checklist of items to determine whether you qualify. Iowa currently audits every return containing a capital gain deduction; it would save a lot of Iowa and taxpayer time and money if the information could be reported with the return as filed, rather than years later when Iowa sends its examination letter.
Related: Iowa Capital Gain Deduction: an illustration
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Taxpayer Advocate starts blog
January 31, 2012
The TaxProf and Peter Pappas note that Nina Olson, the National Taxpayer Advocate, has a blog.
Ms. Olson has done good work pointing out the absurdity complexity of the tax law and the foolish ways in which the rules are enacted. Her record is marred by her advocacy of increased preparer regulation, which the IRS is botching with gusto.
So far she has made two posts since the blog opened on January 11. That's one more than Clarissa Potter has managed since she started Academically Taxing, one of the early tax blogs, in 2004, but she's a long way short of the TaxProf's productivity.
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Chinese New Year Tax Carnival!
January 31, 2012
Kay Bell ushers in the Year of the Dragon with a new Carnival of Taxes!
You can ponder the passing of the Year of the Rabbit at the blog world's finest roundup of tax posts.
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Sometimes three strikes are too many
January 31, 2012
Legendary Oakland A's owner Charles Finley proposed to shake up baseball by awarding walks on three balls and strikeouts after two strikes. It never caught on in baseball, but there's a place for it in the tax law.
Every year or two Congress passes 70 or so "extenders" -- tax breaks provisions enacted with an expiration date, but which they have no intention of letting expire. By pretending the breaks are temporary, they avoid facing up to the true revenue cost.
Len Burman proposes a "three-strikes" rule for Extenders:
I propose a “three strikes and you’re out” rule. After a provision has been extended three times, it should either be made permanent (and its cost fully offset) or it should be erased from the books.
Two strikes is plenty. After the first extension, any further extensions should be scored as a permanent provision, as if it will be in effect forever. But that would require an honest Congress, which is hard to imagine.
Related: Happy 2012! Your taxes may have just gone up!
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Meet the new Iowa tax ideas, just like the old Iowa tax ideas
January 30, 2012
Iowa again scored in the D-/F range on the Tax Foundation's new State Business Tax Climate Index released last week. Iowa did move up from 45 to 41 on the survey, but not because its tax policy improved; it barely changed. Iowa looks better only because other states, notably Illinois, got much worse.
Why is Iowa's business climate perennially awful? Because we have high rates and a complex tax system. The high rates and complexity finance a bunch of deductions and tax credits for favored constituencies. So what what will Iowa do about it?
More Tax Credits! The Des Moines Register reports:
Iowa business leaders, hoping to jump-start a proposed $100 million seed fund, are expected to ask lawmakers to sweeten the tax credits available to lure investors into backing startup companies.What wouldn’t change: The existing $8 million annual cap on state tax credits available to attract seed-fund investment. It was set last year by lawmakers and is part of Iowa’s $120 million annual lid on all tax credits used to spark new jobs and investment.
What could change: Boosting the tax credit used to match investment — now at 20 percent — to possibly as high as 100 percent, the amount that South Carolina and Hawaii provide for early-stage investors.
Of the 31 tax credits listed on Iowa's tax credit summary, Form 148, 22 are some sort of economic development subsidy. Three of them are venture capital credits, directed already at start-ups. A study of Iowa's tax credits in the Culver administration failed to show that any of them did any good.
Iowa can't force feed growth through subsidies. Taking money from some businesses and their employees and giving it to those who know how to work the system doesn't grow Iowa. The Film tax credit debacle should have taught us that.
The best thing Iowa could do for start-ups -- and those who are already here and trying to keep the doors open -- is to give us a low-rate system that is easy to comply with. The Quick and Dirty Iowa Tax Reform would do more to help the state's business environment than any number of targeted tax breaks.
Related: I spent $450 million and all I got were these localized intangible benefits.
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North Platte tax fiasco figures sentenced
January 30, 2012
A defrocked California CPA and some of his North Platte, Nebraska clients were sentenced last week on charges arising out of the accountant's tax planning. From the North Platte Telgraph:
Thursday, California accountant Lowell Baisden was sentenced to 37 months in federal prison for his involvement in the tax evasion scheme involving three North Platte doctors. As part of his plea agreement, several other federal counts were dropped. He will also receive three years of supervised release after his sentence is up.A co-defendant in the case, Michael Koning, a former anesthesiologist in North Platte who has since moved to Montana, was sentenced to five years of probation with a $60,000 fine and was also ordered to pay $989,531 in restitution. Koning, who operated Anesthesia Consulting of Nebraska, also had several counts dropped as part of a plea agreement.
Mr. Baisden was Dr. Koning's brother-in-law, which is how a Bakersfield, California CPA ended up working with a group of medical practitioners in Western Nebraska. Things began to go badly when other local tax practitioners got wind of Mr. Baisden's planning methods, which involved setting up related corporations and, if his own Tax Court case is any indication, some creative accounting.
Mr. Baisden consented to withdrawal of counsel from his case on the grounds that he received bad advice from him. That may telegraph an appeal of his plea or sentence to the Eighth Circuit. It's an ironic argument, considering that reliance on his advice didn't save his clients from their problems.
Other coverage:
Accountant sentenced in North Platte tax dodge scheme
North Platte doctors sentenced for tax evasion (UPDATED)
Prior Tax Update coverage: Plea deal on the Platte
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Addressee well-known
January 30, 2012
With post offices closing all over the place, more people will turn to their local FedEx or UPS, using an authorized private delivery service to document timely filing. If you do that, you need to know the street address for the IRS service center, as private services can't deliver to USPS post office boxes. Russ Fox comes through with an updated list of IRS service center street addresses.
Related: Don't waste your tax prep fee by cheaping out on postage
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Buzzing on out
January 30, 2012
Robert D. Flach has posted "probably" his last Buzz roundup of tax posts for this filing season.
Sometimes you just have to concentrate on making honey.
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On the road
January 27, 2012
Family matters call me out of town today, so no posts.
May that whistle mean your train has arrived!
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