TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, March 10, 2017

Weekly Tax Highlight And Roundup

This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses how the House GPO Affordable Care Act replacement plan complicates 2016 tax filing.

KristanMandate no more? House Republicans released their Obamacare replacement plan yesterday. While the policy implications of the proposal are obviously interesting, this time of year my first question is, “does this affect the current tax season?”

Yes, big league.

The proposal would repeal both the individual mandate and employer mandate retroactive to the beginning of 2016. As we are in the middle of the filing season for 2016 returns, that’s a big deal.

Taxpayers and preparers had a filing season dilemma even before the House GOP announced their plan yesterday. After President Trump issued an executive order telling agencies to be forgiving on ACA enforcement, the IRS changed its plans to allow individuals to file returns without answering health coverage questions — making it possible to file returns ignoring the penalty for lacking ACA-compliant health coverage.

The dilemma is that the tax law still requires the coverage. Practitioners who prepare returns ignoring the coverage questions leave themselves open for penalties from the IRS and to discipline from professional boards that might cover them. But it’s no fun to tell clients that you are filing a return that may be paying a tax they might safely ignore.

The House bill only makes this problem worse for preparers. Unless and until Congress does something, the individual and employer mandates remain in the tax law.

What to do? I think the safest approach is for taxpayers who might be subject to the mandate to extend their returns. If they can pay in the amount of any ACA penalties for 2016, that would make it less painful to file the return should the penalties survive. Even if you don’t pay the mandate penalty with the extension, you avoid any non-filing penalties and reduce any late payment penalties to 1/2% per month.

Unfortunately, doing the right thing professionally might not be the best thing for your clients. If taxpayers really need the big tax refund they will get if they don’t have to pay the computed ACA mandate penalty, and you think it’s likely that either they can get away with ignoring the penalty or that it will be repealed retroactively, can a preparer in good conscience tell them to wait because of practitioner CYA concerns? Should the professional explain that self-filing might get a better, quicker result?

At this point, the IRS should come right out and tell people that it’s OK to ignore the mandate penalties, and that if there are underpayments as a result, they can be paid later without penalty. Otherwise it will be awarding the aggressive and reckless while making compliant taxpayers and practitioners into chumps.

House ACA replacment links:

Monday, March 6, 2017

 

Annette NellenWhat to tell clients about tax reform (video)

Don Boudreaux, What About Losers from Tariffs? (Cafe Hayek). “Or perhaps Adams works in a Ford factory in Michigan.  With the price of steel now made higher by the tariff, Ford produces fewer new cars.”

Gene Steuerle, Before We Reform Tax Policy, We Need to Know What Is Working (TaxVox). “Beyond basic administrative information, the agency could at least on a rotating basis start to evaluate program benefits and costs.”

Jared Walczak, Morgan Scarboro, Georgia House Passes Single-Rate Income Tax Bill. (Tax Policy Blog). “The legislation which cleared the House, HB 329, replaces the six brackets and rates with a single 5.4 percent rate, with an earned income tax credit designed to retain or even enhance tax code progressivity for many low-and middle-income Georgians.”

Jim Maule, The Imperfections of the Philadelphia Soda Tax. “But some taxes are so far from perfect that they need to be classified as counterproductive. This characterization surely describes the Philadelphia soda tax, which I have criticized consistently since it was first proposed.”

Kay Bell, IRS letter announcing latest private tax debt collection effort going out to affected taxpayers:

Remember that assurance from the Internal Revenue Service that its agents never call you about an overdue tax bill.

That’s changing.

As Kay explains, taxpayers will get a letter before anyone calls. Also, you won’t be asked to pay over the phone with a credit card or gift cards.

Leslie Book, Sixth Circuit Holds Potential Misconduct in CDP Hearing Does Not Give Rise to Wrongful Collection Action (Procedurally Taxing).

Lew Taishoff, SAME TIME, NEXT YEAR. “Tax Court holds moveable feasts as it traverses this broad land of ours. It stays not over long in any locale. And it alights in some of its far-flung localities but once in a twelvemonth.”

News from the Profession. The Banking of Things Could Be the Next Technology Accountants Freak Out About (Megan Lewczyk, Going Concern)

TaxGrrrl, Remember: Some Tax Return Due Dates Are Different In 2017

TaxProf, PwC’s Other Debacle: A Tax Boondoggle That Has Ballooned Out Of ControlLinks to the Huffington Post, on Section 199, which says: “If there’s one person to blame for the current 199 predicament, it’s Manousos, a partner at PwC.”

I think the article puts the blame in the wrong place. Section 199, the “Domestic Production Activities Deduction,” arose in 2004 after a special break for export income was ruled an illegal subsidy by the WTO. Rejecting the opportunity to just lower rates on all businesses, Congress passed a special break targeted for manufacturers to lower the rate on “production” income. As anyone could have predicted, clever practitioners find ways to call lots of income “production” income.

The blame for this falls squarely on politicians who were in a frenzy to pass a “jobs” bill in an election year, not on any practitioner. The provision was actually enacted in a bill called the “American Jobs Creation Act of 2004.”

Section 199 was a bad idea to begin with. The idea of separating the components of “manufacturing” from all of the support services that contribute to it in a modern economy is foolish. It serves as a lesson, sure to be ignored, of the unwisdom of subsidies for research, “patent boxes,” or other politically-favored activities.

Tyler Cowen, Should we tax robots? (Marginal Revolution). “One reason not to tax the robots is that employers might substitute away from robots and toward natural resources rather than toward domestic human labor.”

 

Tuesday, March 7, 2017

House ACA replacment links:

Official summary of House GOP plan

Language of tax provisions

Language of non-tax provisions

Andrew Mitchel, New Form 5472 Filing Requirements for Foreign-Owned U.S. Disregarded Entities

Avik Roy, Improving the American Health Care Act’s Coverage for Vulnerable Populations:

On Monday evening, House Republican leadership released their bill to repeal and replace the Affordable Care Act, which they have titled “The American Health Care Act.” As I describe in a lengthy writeup for Forbes, the bill as drafted would make health insurance less affordable for millions of Americans with low incomes and/or poor health status.

But the bill has many salutary aspects, especially its reforms of Medicaid, America’s broken health insurance program for those below the poverty line. And the bill’s chief weakness—its system of flat, non-means-tested tax credits that aim to replace Obamacare’s health insurance exchanges—is fixable. Indeed, the bill itself contains the language Republicans could use to fix it.

Howard Gleckman, How Russia and the Affordable Care Act Are Killing Tax Reform (TaxVox). “What do Russia and the ACA have to do with taxes? Everything.”

Jack Townsend, Search Warrant Executed Against Caterpillar HQ, Apparently Related to Tax. “Notice that the company claims in each of these reports is cooperating with the investigation.  If that is true, I wonder why the need for a search warrant.”

Jason Dinesen, Reminder: There’s No Such Thing as a $500 Non-Cash Charitable Contribution “Standard Deduction” True.

Kay Bell, Life changes that could affect your tax withholding. “And if you don’t give your employer a completed Form W-4, your boss must withhold your income taxes at the highest rate. That’s as if you were single and claimed no withholding allowances.”

Lew Taishoff, THE BUSINESS OF BEING A LAWYER – PART DEUX. “After losing his claim that his law school tuition and fees were deductible, Emmanuel A. Santos, Docket No. 5864-14, filed 3/6/17, tries to wild-card in his health care costs via a shift from Schedule A to Schedule C at the Rule 155 beancount that followed the loss.”

Robert Goulder, Reciprocal Taxes and Parallel Universes (Tax Analysts Blog). “Another week gone by and we’re still no closer to knowing whether President Trump will throw his support behind the tax reform blueprint offered by House Republicans.”

Robert Wood, Like Wesley Snipes, Lawyers Failed To File Taxes, But Did Not File Falsely. “Skipping tax filings is not to be recommended, but filing falsely is in a number of ways even worse”

Roger McEowen, IRS To Target “Hobby” Farmers. “The interim guidance would appear to be targeted toward taxpayers that either farm or crop share some acres where the income ends up on Schedule F, but where other non-farm sources of income predominate (e.g., W-2 income, income from leases for hunting, bed and breakfast, conservation reserve program payments, organic farming, etc.).”

Russ Fox, Two too Many Sets of Books Leads to 41 Months at ClubFed. “Do yourself a favor if you’re in business: Keep one good set of books. Your tax professional will appreciate it.”

Scott GreenbergProposed GOP Healthcare Bill Would Repeal Nearly All ACA Tax Increases (Tax Policy Blog). “The Affordable Care Act contained 21 separate measures to raise federal revenue; the House Republican healthcare bill released this evening would explicitly repeal 14 of those…”

TaxGrrrl, A Quick Look At The GOP Plan To Repeal & Replace Obamacare. “Conservatives in the House aren’t crazy about most of those outcomes – especially revenue-raising (which yes, sounds a lot like new taxes). Others, like Sen. Rand Paul (R-KY), believe that Republicans aren’t doing enough to get rid of existing legislation.”

TaxProf, Paul Caron Named Dean Of Pepperdine Law School:

A widely respected expert in tax law, Caron has written over 50 books and scholarly articles and is the publisher and editor of Tax Prof Blog, the most popular tax blog on the Internet. He is also the owner and publisher of the Law Professor Blogs Network of more than 50 blogs in other areas of law edited by law professors around the country. He was named the third most influential person in legal education by the National Jurist in 2016 and has been listed as one of the 100 most influential people in tax and accounting every year since 2006 by Accounting Today.

Congratulations to Paul, a good guy who has long been a Dean among tax bloggers.

Tyler Cowen, ACHA, the Republican health care plan, appears to be a non-starter

 

 

Wednesday, March 8, 2017

Adam Mansfield, TaxSlayer: Technically Acceptable for VITA Returns? (Surly Subgroup). “As it stands right now, a month into filing season and 16 months after the contract was awarded, TaxSlayer is not capable of preparing an NRA return and the corresponding state return(s) for 2013, 2014 or 2015.”

Arnold Kling, The Making of a Quagmire. On the House GOP healthcare proposal:

It would take a lot of nerve to say: Our plan is to hold households responsible for obtaining health insurance. Some households will “lose” coverage that was heavily subsidized by the government. But if you cannot stand up and say that, then you cannot change the direction of health care policy away from socialism.

And:

After digesting these and other analyses, I am inclined to think that Obamacare will not be repealed and replaced during the Trump Administration. Instead, it will be repealed and replaced by the Democrats the next time they are in power. And the replacement will not look very market-friendly.

Arnold wrote an underappreciated analysis of health care policy in 2008, Crisis of AbundanceIt still is a great read on the problems of health care finance, pointing out the impossible dilemma of insulating consumers from health costs while providing unlimited access without imposing unacceptable costs to whoever does have to foot the bill.

Jack Townsend, Supreme Court Holds Sentencing Guidelines Are Not Unconstitutionally Vague. “The opinion, written by Justice Thomas, reasoned from the historic understanding that a sentencing judge’s discretion to render sentences within the statutory range (such as between 0 months and 60 months for tax evasion under § 7201) did not render that statutory discretion unconstitutionally vague.”

Jim Maule, Tax Fears: Whom to Believe?. “So, should taxpayers be rejoicing at the improved audit lottery odds and perhaps even taking liberties with their returns? Or should they be in panic mode while expecting IRS employees to come knocking on their doors?”

Kay Bell, GOP gets tax reform head start by killing Obamacare taxes in its replacement health care plan.

Kelvin Adkins-Heljeson, Tax in Popular Culture: Border Adjustment Tax (Thomson Reuters Tax & Accounting Blog). “In the advertisement, a salesman mockingly extols the virtues of a wide ranging import tax as a cure-all for the problems of “too much dough” or the back pains from lugging around too much money.”

Kristine Tidgren, First Official ACA Repeal and Replacement Proposal Unveiled (Ag Docket). “his proposal is designed to be eligible for passage through the budget reconciliation process, thereby avoiding a filibuster.”

Lew Taishoff, MESSAGE DELIVERED? “If you’re a constant reader of this my blog (in which case, my sincerest thanks), you’re aware of my ongoing colloquy with Ch J L Paige (“Iron Fist”) Marvel about the admission of CPAs to Tax Court, without the need for all that messy examination process, when only eight percent of those taking the exam actually pass.” But apparently no more.

Megan McArdle, The Republican Plan Is Even Worse Than Obamacare. “Just as Lite foods failed to keep Americans from getting fatter, the GOP version of health-care reform doesn’t fix the huge problems that currently exist in the individual market, notably the fact that thanks to Obamacare, in a few years, we might not even have an individual market.”

News from the Profession. The Best Line of BS I Ever Heard During My Time in Public Accounting (Rachel Andujar, Going Concern)

Paul Neiffer, House Proposes ACA Replacement – A Battle Begins. “This is just the beginning stages of ACA repeal and we know the final result may not look anything like the current proposal, but it is a start.”

Peter Reilly, Tax Litigation Is Not The Place For Alternative Facts. “There is a bigger challenge to would be real estate pros.  You have to spend more time on your real estate trades or businesses than you do on anything else.  This is close to an insurmountable obstacle to most part-time landlords, when they are challenged on audit.”

Richard FloridaHanding Out Tax Breaks to Businesses Is Worse Than Useless:

Even before being sworn in as President, Donald Trump jumped up and down at the chance to showcase the great deal he and Vice-President Mike Pence made to keep a Carrier plant in Indiana. The company pocketed $7 million in tax breaks in exchange for about 800 jobs. But the broad consensus among economists who study the subject is that such business incentives do little to alter the location decisions of companies. In fact, they’re often worse than ineffective—they’re counterproductive. My own take on this site is that they are a useless waste of taxpayer dollars.

The Legislative Service Agency will be making a presentation on Iowa’s tax credits to the House Ways and Means Committee at 10:00 today. I think the above would make a great opening statement.

Richard Phillips, GOP Obamacare Repeal Would Slash Taxes on the Wealthy At the Expense of Middle- and Low-Income Families (Tax Justice Blog). You can’t finance a mass benefit with a class tax.

Scott Greenberg, The House GOP Healthcare Bill Would Repeal $574.5 Billion in ACA Tax Increases (Tax Policy Blog).

Stephen Olsen, One Hake of a Taxpayer Friendly Reasonable Cause Holding (Procedurally Taxing). “So, why do I think the Hakes got lucky (or more specifically their lawyer)?”

TaxGrrrl, Lawsuit Against PayPal Alleges Charities Never Received Donations. “When the company receives a gift intended for a charity that is not enrolled in the platform, the company says that it makes ‘multiple attempts to contact unenrolled charities on a monthly basis for at least six months, via email, letter and, in some cases, phone calls.'”

Tony Nitti, Where Is The ‘Phenomenal’ Tax Plan President Trump Promised?

Tyler Cowen, A Border Adjustment Tax just means more new loopholes (Marginal Revolution). “Full and immediate expensing is a potent lure, and it will attract a great of gamesmanship.”

 

 

Thursday, March 9, 2017

David Brunori, Local Income Taxes: Silly, Dumb and Harmful (Thomson Reuters Tax & Accounting Blog):

But whatever the details or their motivations, local option income taxes are poor policy choices. I say that with some weariness because I think localism is a normative good. And local political autonomy requires local fiscal autonomy. Still, local income taxes don’t work, at least not well, for two reasons. First, local governments cannot effectively redistribute wealth. Local governments that try to take money from the rich and give it to the poor will inevitably end up with more of the latter and less of the former.

Second, local government taxation of business income and capital defies all common understanding of economics. It is hard enough for nations and states to tax mobile capital in a global economy. It is nearly impossible for cities to do so.

Iowa has a local option income tax for school funding. You can increase your income tax bill by moving from West Des Moines to Altoona.

Gordon Mermin, The big tax changes in the House GOP health plan (TaxVox)

Hank Stern, About “Repeal & Replace”. “My initial reaction is that anything over 10 pages is a non-starter (and this one clocks in at 60+, let alone what the final product will actually look like).”

Jason Dinesen, Can a Non-Resident of Iowa Take the Deduction for Health Insurance Premiums?

Jeremy Scott, Economic Substance Doctrine Escapes ACA Repeal (Tax Analysts Blog)

Kay Bell, Looking at Pink Tax effects on International Women’s Day

Keith Fogg, Finding the Right Appraiser and Writing the Report Correctly (Procedurally Taxing). “Practitioners headed into litigation need to vet the expert to make sure that nothing prevents the expert from rendering an impartial opinion.”

Leandra Lederman, Death, Taxes, and a Beach Read (Surly Subgroup) “Some marketer apparently did his or her homework and identified me as someone with an interest in both tax and chick lit!”

Lew Taishoff, “I WOULD PREFER NOT TO” “Takeaway 1- Maybe three years is too short to start shredding records, especially if you’re somewhat casual about when you pay what you owe.”

Meg Wiehe, State Rundown 3/8: Much Ado About Consumption Taxes (Tax Justice Blog). “This week brings more news of states considering reforms to their consumption taxes, on everything from gasoline in South Carolina and Tennessee, to marijuana in Pennsylvania, to groceries in Idaho and Utah, and to practically everything in West Virginia.”

Nicole Kaeding, Kyle Pomerleau, Federal Tax Reform: The Impact on States (Tax Policy Blog):

Multiple provisions within the GOP Blueprint and the Trump tax plans would impact state budgets, and how a state conforms to the federal code impacts state-specific revenue projections. For instance, a state that uses federal taxable income or AGI as its starting point would likely see an increase in revenue due to the elimination of most federal itemized deductions. Under the Trump and GOP tax plans, the federal tax base (the definition of taxable income) would become much broader, leading to an expansion of the state tax base. The federal changes include rate cuts to offset the broader bases, but states set their tax rates independently. Absent state-level changes, states would have a much larger tax base without correspondingly lower rates, leading to higher state-level revenue.

 …

Though the change would not have a direct financial cost to state budgets, the elimination of the state-local taxes paid deduction would force high-income filers, particularly in states like New York and California, to feel the full effect of their states’ high marginal rates. The current federal deduction diminishes the effects of high state rates.

A federal rate reduction actually results in an an Iowa effective rate increase, because it reduces the value of Iowa’s deduction for federal taxes paid. The uncertainty over federal reform may be one reason Iowa is moving slowly on its own reforms.

Robert Wood, Filing Your Taxes Is Not Self-Incrimination, Rules Court. You can’t get out of taxes by taking the Fifth.

Roger McEowen, Deductibility of Soil and Water Conservation Expenses. “Expenses for leveling, conditioning, grading, terracing and contour furrowing are all eligible as are costs associated with the control and protection of diversion channels, drainage ditches, irrigation ditches, earthen dams, water courses, outlets and ponds.”

Russ Fox, Casinos and ITINs: IRS Confirms Cease and Desist Letters Sent to “Several Large Casinos” (Update #2)

Senay Redda, Alas! The ACA Repeal & Replace legislation is here (Thomson Reuters Tax & Accounting Blog).

TaxGrrrl, Jason Derulo Wants To Deduct $73,000 On His Taxes For Twerk-Related Expenses. “While your first reaction might be to laugh out loud at the idea of deducting tens of thousands of dollars in nightclub-related costs as a business expense, it’s important to read the paragraph above one more time.” Maybe he’ll push for twerkers comp reforms.

TaxProf, NY Times:  Dartmouth Prof Accuses Caterpillar Of Tax Fraud In Report Commissioned By Federal Investigators.

 

Friday, March 10, 2017

Annette Nellen, Taxes and the sharing economy.

Career Corner, 5 Ways to Steal Some Time Back This Busy Season (Megan Lewczyk, Going Concern)

David Henderson, Is Taxing One Item Because It’s in a Subsidized Category a Good Idea? (Econlog) “So a way to offset the subsidy, if the first-best solution of eliminating or reducing the subsidy is, for some reason, off the table, is to tax the thing being subsidized.”

Howard Gleckman, Do The Tax Provisions of the House GOP Health Bill Pass Its Own Tax Reform Test? (TaxVox). “Not surprisingly, the answer is: some are, and some are not.”

Joseph Thorndike, Liberals Should Take the Credit – And the Blame – for Big Government (Tax Analysts Blog):

It may seem like political genius to trumpet benefits while obscuring price tags, but it’s just the opposite. People value things they pay for – and they don’t value the things they get for free. That can be a problem when new programs come under attack. After all, if something isn’t worth paying for in the first place, it’s probably not worth defending, either.

But it’s easier to vote for free stuff when someone else is paying for it.

Kay Bell, IRS telephone service is improving, but will it last?. “After years of declining telephone assistance, an IRS executive and two other federal agency reps told a March 8 joint hearing of two House Oversight and Government Reform subcommittees that taxpayer telephone service has been improving.”

Kristine Tidgren, Will 2017 Be the Year for Iowa Water Quality Funding? (Ag Docket) “The bills would both effectively divert sales tax assessments on sales of water by utilities to consumers and users to a new water quality fund.”

Leslie Book, Shredding Documents and Proving You Paid a Tax: Lawyer Cannot Prove Payment (Procedurally Taxing). “Yet this case is a good reminder that it is on the taxpayer to prove payment, and testimony alone in the absence of proof is likely not enough if IRS records do not reflect payment.” That’s for sure.

Lew Taishoff, THE PLOT THICKENS. “A lot of electrons have been set in motion by the celebrated case of Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor, Docket No. 17152-13, filed 3/9/17.” Yes, that Michael J. Jackson.

Megan McArdle, Republicans Should Kill Obamacare or Let It Die. “If Republicans cannot get up the will to bear those costs, then they should do nothing, and start preparing their rebuilding strategy while they wait for the flaws in Obamacare’s structure to bring down the individual market on its own.”

Morgan Scarboro, State Individual Income Tax Rates and Brackets for 2017 (Tax Policy Blog):

Individual income taxes are a major source of state government revenue, accounting for 36 percent of state tax collections.[1] Their prominence in public policy considerations is further enhanced by the fact that individuals are directly responsible for filing their income taxes, in contrast to the indirect payment of sales and excise taxes. To many taxpayers, the personal income tax is practically synonymous with their own tax burdens.

Forty-three states levy individual income taxes. Forty-one tax wage and salary income, while two states—New Hampshire and Tennessee—exclusively tax dividend and interest. Seven states levy no income tax at all.

Iowa’s top stated rate is a deceptively-high 8.98%. Only four states have a higher stated rate. Considering the deduction for federal taxes that Iowa allows, the real effective Iowa rate on highest-income taxpayers is a much less unpleasant 5.18% rate. The effective rate will go up if the federal top rate comes down as expected.

Peter Reilly, Lawsuit Challenging Charities Backing Israeli Settlements Fails On Standing. ” When it comes to exempt function, though, it seems the IRS can’t please anybody.”

Richard Phillips, Debunking the 35 Percent Corporate Tax Myth (Tax Justice Blog):

A new study by the Institute on Taxation and Economic Policy (ITEP) reveals the reality that while corporations face a statutory tax rate of 35 percent, the tax code is so packed full of tax breaks that over eight years our nation’s largest and most profitable corporations paid an average effective tax rate of just 21.2 percent.

This is the national version of the story that Iowa’s highest-in-the-nation corporation tax doesn’t matter because corporations pay less than the stated 12% rate due to tax rates. It ignores the incentive that the high rates provide to game the system. Also, when decisions are made on the margin, the top rate is the relevant rate.

Robert Wood, Can You Opt Out Of Big IRS Offshore Penalties? On the Offshore Voluntary Disclosure Program: “Bottom line? The OVDP is predictable. Opting out is much less so, so think about your facts.” The best way to opt out of the penalties, of course, is to not incur them in the first place. Be sure to keep your tax pro informed of any foreign investments you might make.

Sam Brunson, The Taxman and Jazz Radio (Surly Subgroup). “And just like that, two of my favorite things—jazz and taxes—intersected.”

TaxGrrrl, Taxpayers Slow To File Even Though IRS No Longer Required To Hold Tax Refunds. “While refund numbers are still down , so, too, are the numbers for returns received and returns processed. Even trips to IRS.gov are down.”

Tyler Cowen, Jason Furman and Olivier Blanchard on the Border Adjustment Tax (Marginal Revolution). “As trade deficits eventually turn into trade surpluses, and thus border adjustment net revenues turn from positive to negative, the other tax cuts it initially financed will still be on the books. Sooner or later, taxes will have to increase, or spending will have to be reduced, to compensate for the shortfall.”

 

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