TaxProf Blog

GAO Releases Two Tax Reports

The Government Accountability Office yesterday released two tax reports:

• Electronic Tax Return Filing: Improvements Can Be Made Before Mandate Becomes Fully Implemented (GAO-11-344) (Mar. 7, 2011)
• Illicit Tobacco: Various Schemes Are Used to Evade Taxes and Fees (GAO-11-313) (Mar. 7, 2011) 

TIGTA: The IRS Pays $12 Billion/Year in Phony EITC Claims -- A 25% Error Rate

The Treasury Inspector General for Tax Administration yesterday released  Reduction Targets and Strategies Have Not Been Established to Reduce the Billions of Dollars in Improper Earned Income Tax Credit Payments Each Year (2011-40-023):

The GAO has listed the Earned Income Tax Credit (EITC) Program as having the second highest dollar amount of improper payments of all Federal programs. The IRS has made little improvement in reducing EITC improper payments since 2002 when it was first required to report estimates of these payments to Congress. The IRS continues to report that 23% - 28% of EITC payments are issued improperly each year. In Fiscal Year 2009, this equated to $11 billion to $13 billion in EITC improper payments.

• Accounting Today, IRS Can’t Stop Paying Billions in Bogus EITC Claims
• Associated Press, IRS Not Stopping Billions Improper Tax Credits

TIGTA: 20% Error Rate in Tax Credits Claimed for Electric and Hybrid Cars

The Treasury Inspector General for Tax Administration today released Individuals Received Millions of Dollars in Erroneous Plug-in Electric and Alternative Motor Vehicle Credits (2011-41-011):

Approximately $33 million in credits for plug-in electric and alternative-fueled vehicles credits were erroneously claimed by at least 12,920 taxpayers through July 24, 2010. ... That means about 20% of the $163.9 million in credits claimed by taxpayers from January 1, 2010 to July 24, 2010 for plug-in electric and alternative motor vehicle credits were claimed in error. In the course of its review, TIGTA also found that 1,719 of the 12,920 individuals also erroneously reduced the amount of Alternative Minimum Tax they owed by almost $5.3 million.

According to TIGTA’s review, approximately 29 prisoners also received $49,926 in vehicle credits even though they were in prison all of Calendar Year 2009. The erroneous claims TIGTA identified resulted from inadequate IRS processes to ensure information reported by individuals claiming the credits met qualifying requirements for vehicle year, placed in-service date, and make and model. TIGTA’s review of electronically filed tax returns identified individuals who erroneously claimed the same vehicle for multiple plug-in electric and alternative motor vehicle credits or claimed an excessive number of vehicles for personal use credits. TIGTA also determined that the IRS cannot track and account for plug-in electric and alternative motor vehicle credits claimed by individuals on paper-filed tax returns because it has not established processes to capture this information from those returns.

Joint Tax Committee Releases List of Expiring Federal Tax Provisions, 2010-2020

The Joint Committee on Taxation today released List of Expiring Federal Tax Provisions 2010-2020 (JCX-2-11):

This document ... provides a listing of Federal tax provisions (other than those providing time-limited transition relief after the repeal of an underlying rule) that are currently scheduled to expire in 2010-2020 (with references to the applicable section of the Internal Revenue Code of 1986 or other applicable law). Expiring Federal tax provisions providing temporary disaster relief are separately listed in Part II of the document.

For purposes of compiling this list, the staff of the Joint Committee on Taxation considers a provision to be expiring if, at a statutorily specified date, the provision expires completely or reverts to the law in effect before the present-law version of the provision. Certain provisions terminate on dates that refer to a taxpayer’s taxable year and not a calendar year. For these provisions, the expiration dates listed in this document apply with respect to calendar year taxpayers. The expiration dates of such provisions may differ, however, with respect to fiscal year taxpayers or taxpayers with short taxable years.

GAO Cannot Render Opinion on Government's Financial Statements

The Government Accountability Office has released A Citizen's Guide to the 2010 Financial Report of the U.S. Government (268 pages):

For FY 2010, the Government Accountability Office (GAO) issued a disclaimer of audit opinion on the accrual-based Governmentwide financial statements for the fourteenth consecutive year.

Accounting Today, GAO Sees Problems in Government’s Financial Management:

The U.S. Government Accountability Office said it could not render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations. ...

The main obstacles to a GAO opinion were: (1) serious financial management problems at the Department of Defense that made its financial statements unauditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements.

In addition, the GAO said last week it was unable to render an opinion on the 2010 Statement of Social Insurance because of significant uncertainties, primarily related to the achievement of projected reductions in Medicare cost growth. ...

“Given the federal government’s fiscal challenges, it’s imperative that Congress, the administration, and federal managers have reliable, useful, and timely financial and performance information,” [Acting Comptroller General Gene] Dodaro said. “Improved accuracy and transparency in financial reporting are urgently needed.”

(Hat Tip: InstaPundit.)

Joint Tax Committee Releases Tax Expenditure Estimates for 2010-14

The Joint Committee on Taxation yesterday released Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 (JCS-3-10):

Part I of this report contains a discussion of the concept of tax expenditures. Part II is a discussion of the measurement of tax expenditures. Estimates of tax expenditures for fiscal years 20102014 are presented in Table 1 in Part III. Table 2 shows the distribution of tax returns by income class, and Table 3 presents distributions of selected individual tax expenditures by income class.

Update: From Richard Kaplan (Illinois):

The Joint Committee on Taxation’s Tax Expenditures Report does not consider any of the tax extensions and other changes enacted by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act, Pub. L. No. 111-312, as signed by President Obama on December 17. Because every tax expenditure provision is reduced to a number using applicable income tax rates, virtually every number for 2011 and 2012 (as well as the resulting five-year totals) is seriously overstated.

53% of Economists Work for the Government

According to the Bureau of Labor Statistics' Occupational Outlook Handbook 2010-2011, 53% of all U.S. economists work for the government (31% in the federal government and 22% in state and local government). (Hat Tip: New York Times Economix.)

CBO: Tax Cuts Were Least Effective Stimulus in Recovery Act

The Congressional Budget Office has released Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output From July 2010 Through September 2010 (Nov. 2010), which reports that the tax relief included in the Recovery Act had less of a stimulative impact than either government purchases or transfer payments to individuals and governments.

 
 

Center on Budget and Policy Priorities, New CBO Report Finds up to 3.6 Million People Owe Their Jobs to the Recovery Act:

Among ARRA’s most effective provisions for saving and creating jobs, according to CBO’s estimates, are direct purchases of goods and services by the federal government, transfer payments to states (such as extra Medicaid funding), and transfer payments to individuals (such as increased food stamp benefits and additional weeks of unemployment benefits). CBO’s estimates indicate that tax cuts are less effective job producers, and tax cuts for higher-income people and corporations have very low bang for the buck.

TIGTA: IRS Fails to Properly Utilize Currency Report Data to Catch Tax Cheats

The Treasury Inspector General for Tax Administration today released Currency Report Data Can Be a Good Source for Audit Leads (2010-30-104):

Individuals who fail to file required returns or underreport their income can create unfair burdens on honest taxpayers and diminish the public’s respect for the tax system. While currency reports may be commonly associated with money laundering, TIGTA identified a number of individuals who have enough cash to engage in currency transactions totaling at least $20,000, but did not file tax returns even though they appeared to have a filing requirement.

A number of other individuals engaged in similar currency transactions filed tax returns, but reported income that does not appear sufficient to cover their basic living expenses.

IRS Increases Scrutiny of Taxpayers With Foreign Assets

The Treasury Inspector General for Tax Administration today released New Legislation Could Affect Filers of the Report of Foreign Bank and Financial Accounts, but Potential Issues Are Being Addressed (2010-30-125):

[T]he number of FBAR-related examinations increased 96 percent (from 334 to 656) from Fiscal Year (FY) 2004 to FY 2009. In addition, the number of FBAR penalty assessments grew from $4.2 million to $20.5 million, an increase of 388 % over the same period, while FBAR penalty collections grew from $1.8 million to $9.8 million, an increase of 444%. The IRS, in collaboration with the Department of the Treasury’s Financial Crimes Enforcement Network, has also revised the FBAR form and instructions and conducted education and outreach efforts on the filing of FBARs.

GAO: Compliance Costs of ObamaCare's 1099 Reporting Requirement Are Low

At yesterday's hearing of the Senate Committee on Small Business and Entrepreneurship on Assessing the Regulatory and Administrative Burdens on America’s Small Businesses, James R. White, Director of Tax Issues at the Government Accountability Office, testified on Small Businesses: Tax Compliance Benefits and Opportunities to Mitigate Costs on Third Parties of Miscellaneous Income Reporting Requirements (GAO-11-218T):

Information reporting is a powerful tool for encouraging voluntary compliance by payees and helping IRS detect underreported income. Also, information reporting may sometimes reduce taxpayers’ costs of preparing their tax returns, although by how much is not known. IRS estimated that $68 billion of the annual $345 billion gross tax gap for 2001, the most current available estimate, was caused by sole proprietors underreporting their net business income. A key reason for this noncompliance was that sole proprietors were not subject to tax withholding and only a portion of their net business income was reported to IRS by third parties. The benefits from information reporting are affected by payers’ compliance with reporting requirements and IRS’s ability to use the information in its process that matches third-party data with tax returns. ...

 
This testimony summarizes recent GAO reports and provides information on (1) benefits of the current requirements in terms of improved compliance by taxpayers and reduced taxpayer recordkeeping, (2) costs to the third-party businesses of the current 1099-MISC reporting requirement, and (3) options for mitigating the reporting burden for third-party businesses. GAO has not assessed the expansion of 1099-MISC reporting to payments for goods.

Current 1099-MISC requirements impose costs on the third parties required to file them. The magnitude of these costs is not easily estimated because payers generally do not track these costs separate from other accounting costs. In nongeneralizable case studies conducted in 2007 with four payers and five vendors that file information returns on behalf of their clients, GAO was told that existing information return costs were relatively low. One small business employing under five people told GAO of possibly spending 3 to 5 hours per year filing Form 1099 information returns manually, using an accounting package to gather the information. Two vendors reported prices for preparing and filing Forms 1099 of about $10 per form for 5 forms to about $2 per form for 100 forms, with one charging about $0.80 per form for 100,000 forms.

At yesterday's hearing, Winslow Sargeant, Chief Counsel for Advocacy U.S. Small Business Administration, testified on the regulatory and administrative burdens on small businesses and endorsed the repeal of the ObamaCare's 1099 reporting obligation:

TIGTA: IRS Needs to Better Protect Federal Tax Liens in Mortgage Foreclosures

The Treasury Inspector General for Tax Administration today released Coordination and Procedures for Foreclosures Can Be Improved (2010-30-119):

The IRS was inconsistent in how it processed foreclosure cases and coordinated with local United States Attorneys' Offices (USAO). ...

When a taxpayer fails to pay taxes owed, the IRS may attach a claim to a taxpayer's real property -- a claim known as a Federal Tax Lien. The IRS files a Notice of Federal Tax Lien (NFTL) in appropriate local government offices, notifying interested parties that a lien exists on the property. When property has a Federal Tax Lien attached, the IRS may collect proceeds from a foreclosure sale to cover the taxes owed.

A foreclosure is either judicial or non-judicial. The USAO is responsible for protecting the Federal Government's interest in judicial foreclosure sales, while the IRS is responsible for protecting the Federal Government's interest in non-judicial foreclosure sales. Although the IRS does not have the primary responsibility to protect the Federal Government's interest in judicial foreclosure proceedings, it must coordinate such proceedings with the USAO.

TIGTA reviewed whether the IRS effectively and efficiently protects the Federal Government's interest during foreclosure proceedings when an NFTL has been filed. TIGTA found that the IRS could improve its coordination with the USAO for judicial foreclosures. TIGTA also found that the information the IRS provided to the public for submitting a timely notice of sale for non-judicial foreclosures was inconsistent with the Internal Revenue Code.

CRS: Cost of Extending Bush Tax Cuts = $5 Trillion

BNA has made available a Congressional Research Service report, The Bush Tax Cuts and the Economy (R41393), by Thomas L. Hungerford. The report states that the total cost of extending all of the 2001 and 2003 Bush tax cuts would be $5.048 trillion over the next decade, when taking into account the cost of indexing the alternative minimum tax and the cost of debt service [click on chart to enlarge] 

In September, the CRS had estimated the cost of extending the Bush tax cuts as $2.8 trillion over ten years.

GAO Releases Two Tax Reports

The Government Accountability Office today released two tax reports:

• Tax Debt Collection: IRS Could Improve Future Studies by Establishing Appropriate Guidance (GAO-10-963)
• Tax Gap: IRS Can Improve Efforts to Address Tax Evasion by Networks of Businesses and Related Entities (GAO-10-968)

Open CRS Releases Tax Reports

• The Bush Tax Cuts and the Economy (R41393)
• The Economic Effects of Capital Gains Taxation (R40411)
• The OECD Initiative on Tax Havens (R40114)
• Tax Credit Bonds: Overview and Analysis (R40523)
• Tax Deductible Expenses: The BP Case (R41365)
• Tax Havens: International Tax Avoidance and Evasion (R40623)
• Tax Issues and the Gulf Oil Spill: Analysis of Payments and Tax Relief Policy Options (R41323) 

GAO Releases Two Tax Gap Reports

The Government Accountability Office has released two reports on reducing the tax gap:

• Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven Mortgage Debt (GAO-10-997)
• IRS Has Modernized Its Business Nonfiler Program but Could Benefit from More Evaluation and Use of Third-Party Data (GAO-10-950)

Census Bureau Releases Income, Poverty Data

The U.S. Census Bureau today released the results of the 2009 American Community Survey. From the press release:

 Median Household Income

• Real median household income in the United States fell between 2008 and 2009 — decreasing by 2.9 percent from $51,726 to $50,221.
• Between 2008 and 2009, real median household income decreased in 34 states and increased in one: North Dakota.

 Poverty

• Thirty-one states saw increases in both the number and percentage of people in poverty between 2008 and 2009.
• No state had a statistically significant decline in either the number in poverty or the poverty rate.

Reports:

• Poverty: 2008 and 2009
• Household Income for States: 2008 and 2009
• Men’s and Women’s Earnings for States and Metropolitan Statistical Areas: 2009

Press and blogosphere coverage:

• The Atlantic, 4 Reasons Why the Income Gap Increased in 2009
• Bloomberg, Michigan, Florida Lead 34 States With Drop in Median Income, Census Says
• Huffington Post, Income Gap Widens: Census Finds Record Gap Between Rich And Poor
• New York Times, The Poorest States of America
• Time, Census: Record Gap Between Rich and Poor
• USA Today, U.S. Census Finds Record Income Gap Between Rich and Poor
• Washington Post, As 44 Million Americans Live in Poverty, a Crisis Grows

President's Economic Recovery Advisory Board to Discuss Tax Options at Today's Meeting

The President’s Economic Recovery Advisory Board (PERAB) meets today at 2:00 p.m. EST via conference call (live webcast available here).  From the agenda:

The discussion will include Board review of a report by the Tax Reform subcommittee. The report discusses a spectrum of reform ideas relating to tax simplification, enforcement of existing tax laws, and reform of the corporate tax system, without considering policies that would raise taxes on families making less than $250,000. The PERAB is not tasked with providing its own policy recommendations for the Administration and the final report will be an almanac of options from a broad range of viewpoints. The PERAB will vote on presenting the report as formal advice to the President.

TIGTA: IRS Fails to Properly Monitor 25% of Section 527 Political Organizations

The Treasury Inspector General for Tax Administration today released Improvements Have Been Made, but Additional Actions Could Ensure That Section 527 Political Organizations More Fully Disclose Financial Information (2010-10-018):

This report presents the result of our review of the filing compliance of Section 527 political organizations. ... The IRS has taken significant actions to improve its ability to identify political organizations that do not timely notify the IRS of their existence or timely submit reports of their contributions and expenditures. However, the IRS has not fully addressed noncompliance among political organizations. For example, one out of every four Political Organization Report of Contributions and Expenditures (Form 8872) that we reviewed had incomplete or missing contributor or recipient information. While some of these filings may later be deemed acceptable, we determined the IRS is not reviewing these filings to determine if they are complete or if penalties should be assessed. Also, the IRS is not always issuing notices at the appropriate time that include all information needed by political organizations to become compliant. Lastly, the IRS is not following up on information it has requested from political organizations to verify compliance. ...

Although the EO function has taken action to identify noncompliant political organizations, we believe EO function management should focus on addressing noncompliance through increased enforcement actions. The assessment of taxes and penalties for incomplete filings, when appropriate, could lead to increased accountability and disclosure by political organizations. Improvement in the notice process could also assist political organizations in complying with their responsibilities.

TIGTA: IRS Lacks Adequate Internal Controls in Spending $203m in Stimulus Funds

The Treasury Inspector General for Tax Administration today released Concerns About Contracting Officer’s Technical Representatives That Are Relevant to the American Recovery and Reinvestment Act of 2009 Procurements (2010-11-087):

Procurements that are both awarded and planned by the IRS as part of the American Recovery and Reinvestment Act of 2009 may be at risk due to inadequate oversight. ... The IRS received $203 million as part of the Recovery Act to reprogram its computer systems and to update tax forms, publications and customer services. As of April 2010, the IRS had initiated or was in the process of initiating 26 procurement actions on Recovery Act program initiatives with a total contract value of $81.9 million. Despite the influx of Recovery Act money, the IRS has not completed steps to improve contract oversight by its Contracting Officers' Technical Representatives, who administer the technical aspects of government contracts following their award. 

• TIGTA: IRS Did Not Comply With Stimulus Act's Procurement Requirements (Aug. 17, 2010)

Joint Tax Committee Releases Description of Tax Provisions in Obama's FY 2011 Budget

The Joint Committee on Taxation yesterday released Description of Revenue Provisions Contained in the President’s Fiscal Year 2011 Budget Proposal (JCS-2-10) (521 pages):

This document ... provides a description and analysis of the tax provisions that are included in the President’s fiscal year 2011 budget proposal, as submitted to the Congress on February 1, 2010. The document generally follows the order in which the provisions are set forth in the table providing estimates of the revenue effects of the revenue proposals contained in the President’s budget proposals. For each provision, there is a description of present law and the proposal (including effective date), a reference to relevant prior budget proposals or recent legislative action, and an analysis of policy issues related to the proposal.

CRS: Official Scores Underestimate Revenues from Planned Capital Gains Tax Hikes

The Congressional Research Service has issued Capital Gains Tax Options: Behavioral Responses and Revenues (R41364), by Jane G. Gravelle. From BNA:

Among the expiring Bush tax cut provisions is a lower 15% rate for long-term capital gains and dividends, with a 0% rate for taxpayers with ordinary tax rates of 15% or less. With no change, capital gains tax rates will revert to a top rate of 20% (10% for those with a 0% rate). Dividends will be taxed at ordinary rates. For FY2010 (for example), Treasury has projected revenue gains from these provisions to be $16 billion for capital gains and $30 billion for dividends.

President Obama has proposed to retain the 15% and 0% rates for lower- and middle-income taxpayers, but to tax both dividends and capital gains at 20% for married couples with income of $250,000 or more and single taxpayers with income of $200,000 or more. Because the increase in dividend tax rates was limited, about 80% of the projected $15 billion gain from this revision (for FY2019) is estimated to be from capital gains tax increases.

Compared with most other tax provisions, the potential revenue gain scored for an increase in capital gains taxes is strongly affected by behavioral responses assumed by the Joint Committee on Taxation (JCT) and the Treasury Department. The analysis in this study suggests that the Administration’s projections and those of the JCT, absent a change in their realizations response, may likely understate revenue gains from allowing lower capital gains tax rates to expire.

Realizations responses were first added to revenue projections by the revenue estimating agencies (Joint Committee on Taxation and the Treasury) at the end of the 1980s, in the midst of a contentious debate. The larger the absolute value of the elasticity (the percentage change in realizations divided by the percentage change in taxes) the smaller the revenue gain, and with elasticities larger than one in absolute value, a loss would occur. Estimated elasticities in the literature prior to 1990 ranged from 0.3 to almost 3.8, leaving limited guidance for revenue estimating agencies. JCT used an elasticity of 0.76, whereas Treasury used an elasticity of one.

Concerns were raised at that time that there were serious problems with this evidence. Perhaps the most significant concern was that the larger results from studies of individuals reflected a timing or transitory response (high income taxpayers with variable income chose to realize gains during times that tax rates were temporarily low). This transitory response is not appropriate for assessing a permanent change.

Evidence and studies since that time suggest that the permanent elasticity is considerably lower than what appeared to be the case in 1990. The surge in realizations in 1986 as a capital gains tax rate increase was preannounced provided compelling evidence of the importance of a transitory response. A study of the limits of realizations (which cannot exceed accruals in the long run) suggested the elasticity could be no more than 0.5. And a number of new econometric studies, using new techniques to isolate the permanent response, suggested elasticities of around 0.5 or less. The JCT appears to maintain their original assumption, while the Treasury response has been reduced to be similar to JCT’s.

Although projected revenues for FY2019 would be smaller than that estimated in January 2010 by the Administration, due to the Medicare tax, the revenue gain from allowing the capital gains tax to rise could be up to twice as much as that projected by the JCT for FY2019 if the smaller responses estimated in more recent studies were applied. It is reasonable to expect revenue gains of $28 billion, rather than the $13 billion likely to be projected by JCT if they maintain their current realizations response assumptions, and the gain is unlikely to be less than $18 billion.

Joint Tax Committee Releases Distributional Analysis of Dueling Bush Tax Cut Proposals

The Joint Committee on Taxation has released a distributional analysis (and subsequent correction) (links courtesy of BNA) of Democratic and Republican proposals for dealing with the expiring Bush tax cuts.  

CRS: Form 1099 Reporting Requirements as Modified by ObamaCare

The Congressional Research Service has issued Form 1099 Information Reporting Requirements as Modified by the Patient Protection and Affordable Care Act (R41359):

Under § 6041, persons engaged in a trade or business who make payments totaling at least $600 to another person in a single year are required to file an information return (typically a Form 1099) with the IRS and to provide the payee with a copy. For payments made after December 31, 2011, § 9006 of P.L. 111- 148, the Patient Protection and Affordable Care Act (PPACA), expanded the information reporting requirements contained in I.R.C. § 6041. Under the amended provision, most payments to corporations will no longer be exempt from reporting and the types of payments that can trigger the reporting requirement will include gross proceeds and amounts received by a payee in consideration for property.

A payer’s failure to file a timely and accurate information return with the IRS can result in monetary fines; criminal sanctions may be applicable where such failure is willful. Payers may also be penalized for failing to provide a timely and accurate copy of an information return to their payees.

In the 111th Congress, several bills and amendments have been introduced that would repeal the modifications made to I.R.C. § 6041 by PPACA § 9006. Both versions of the Small Business Paperwork Mandate Elimination Act, S. 3578 and H.R. 5141, would repeal PPACA § 9006 entirely. Similar provisions have also been proposed in Senate amendments to H.R. 5297 and in § 1 of H.R. 5982.

Legislation has also been proposed to require landlords to file information returns for payments made with respect to their rental properties and to increase the penalties for failing to file an information return. The House passed such a provision in H.R. 4849. A provision with similar language was passed by the Senate in its consideration of a different bill, H.R. 4213. However, this language was ultimately struck by a House amendment in the nature of a substitute while resolving differences with the Senate.

TIGTA: IRS Fails to Properly Consider Accuracy-Related Penalties in 92% of Audits

The Treasury Inspector General for Tax Administration yesterday released Accuracy-Related Penalties Are Seldom Considered Properly During Correspondence Audits (2010-30-059):

The IRS must take additional steps to ensure that accuracy-related penalties are appropriately considered when assessing correspondence audits. ...

A TIGTA review of 229 correspondence audits closed in Fiscal Year 2008 found that 211 (92%) of the audits were not considered and assessed in accordance with IRS procedures for accuracy-related penalties. ... Appropriately assessing this penalty would have resulted in estimated increased revenues of $3.5 million.

CRS: Tax Issues and the Gulf of Mexico Oil Spill

The Congressional Research Service has released Tax Issues and the Gulf of Mexico Oil Spill: Legal Analysis of Payments and Tax Relief Policy Options (R41323) (July 15, 2010), Here is the abstract:

Legislation has been introduced in the House and is being discussed in the Senate that would provide tax relief to the Gulf Coast oil spill victims. The Oil Spill Tax Relief Act of 2010 (H.R. 5598) would require that any compensation provided by BP to an oil spill victim be treated as a qualified disaster payment, and thereby excluded from gross income for tax purposes. The Gulf Coast Access to Savings Act of 2010 (H.R. 5602) would allow for enhanced access to retirement savings. The Gulf Oil Spill Recovery Act of 2010 (H.R. 5699) would make various tax relief measures available to businesses and individuals. Senate discussions include proposals similar to what has been introduced in the House, as well as a tax holiday for tourism-related activities.

TIGTA: IRS Did Not Properly Manage New $574m e-File System

The Treasury Inspector General for Tax Administration today released Modernized e-File Will Enhance Processing of Electronically Filed Individual Tax Returns, but System Development and Security Need Improvement (2010-20-041):

The IRS's Modernized E-file (MeF) system did not process electronically filed individual tax returns as effectively as it should have during the 2010 filing season. ...  The estimated $574 million MeF system is replacing the IRS's current tax-return filing technology with a modernized, Internet-based electronic filing platform. ... The MeF project development team did not adequately manage the MeF Release 6.1 testing prior to deployment, TIGTA found. IRS's test report showed all requirements were tested and passed; however, TIGTA auditors found supporting test documents showed that many of the requirements were not tested, many more failed the tests, and no indication was provided to show the defects were corrected. Subsequently, the MeF system rejected 23% of the 127,105 individual tax returns that were e-filed during the system's initial three weeks of operation. TIGTA also found that the IRS has not addressed many of the security vulnerabilities with the MeF system identified in a December 2009 TIGTA report.

TIGTA recommended that the IRS: ensure that project releases are deployed only after verifying that all system requirements have been tested, consider lessons learned from prior deployment experiences in planning future releases, and ensure that the MeF team enter and track all MeF system security weaknesses in IRS control systems.

CRS: International Tax Avoidance and Evasion

Open CRS has posted Tax Havens: International Tax Avoidance and Evasion (R40623) (June 4, 2010), by Jane G. Gravelle (Senior Specialist in Economic Policy). Here is the Summary:

The federal government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries, often referred to as tax havens. The revenue losses from this tax avoidance and evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax abuses may be around $100 billion per year. International tax avoidance can arise from large multinational corporations who shift profits into low-tax foreign subsidiaries or wealthy individual investors who set up secret bank accounts in tax haven countries.

Recent actions by the Organization for Economic Cooperation and Development (OECD) and the G-20 industrialized nations have targeted tax haven countries, focusing primarily on evasion issues. The recently adopted HIRE Act (P.L. 111-147) included a number of anti-evasion provisions. There are also a number of legislative proposals that address international evasion and avoidance issues, including the American Jobs and Closing Loopholes Act (H.R. 4213) passed by the House on May 28, 2010; the Stop Tax Haven Abuse Act (S. 506, H.R. 1265); draft proposals by the Senate Finance Committee; two other related bills, S. 386 and S. 569; the Bipartisan Tax Fairness and Simplification Act (S. 3018); and proposals by President Obama.

Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions using a variety of techniques, such as shifting debt to high-tax jurisdictions. Since tax on the income of foreign subsidiaries (except for certain passive income) is deferred until repatriated, this income can avoid current U.S. taxes and perhaps do so indefinitely. The taxation of passive income (called Subpart F income) has been reduced, perhaps significantly, through the use of “hybrid entities” that are treated differently in different jurisdictions. The use of hybrid entities was greatly expanding by a new regulation (termed “check-the-box”) introduced in the late 1990s that had unintended consequences for foreign firms. In addition, earnings from income that is taxed can often be shielded by foreign tax credits on other income. On average very little tax is paid on the foreign source income of U.S. firms. Ample evidence of a significant amount of profit shifting exists, but the revenue cost estimates vary from about $10 billion to $60 billion per year.

Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting income earned abroad. In addition, since interest paid to foreign recipients is not taxed, individuals can also evade taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel funds. There is no general third party reporting of income as is the case for ordinary passive income earned domestically; the IRS relies on qualified intermediaries (QIs) who certify nationality without revealing the beneficial owners. Estimates of the cost of individual evasion have ranged from $40 billion to $70 billion.

Most provisions to address profit shifting by multinational firms would involve changing the tax law: repealing or limiting deferral, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or even formula apportionment. President Obama’s proposals include a proposal to disallow overall deductions and foreign tax credits for deferred income and restrictions on the use of hybrid entities. Provisions to address individual evasion include increased information reporting and provisions to increase enforcement, such as shifting the burden of proof to the taxpayer, increased penalties, and increased resources. Individual tax evasion is the main target of the HIRE Act, the proposed Stop Tax Haven Abuse Act, and the Senate Finance Committee proposals; some revisions are also included in President Obama’s plan.

'Sin Tax' Revenue Surges

The Treasury Department's Alcohol and Tobacco Trade and Tax Bureau has released its Fiscal Year 2009 Annual Report, detailing a 41% increase (to $20.6 billion) in the amount of "sin taxes" on alcohol, tobacco, firearms, and ammunition collected by the federal government.  Most of the $6 billion revenue increase resulted from the higher tobacco taxes included in the Children's Health Insurance Reauthorization Act of 2009.  Firearms and ammunition excise tax collection rose 45%, the largest annual increase in the agency's history. Reuters explains the surge in firearms and ammunition excise taxes in FY 2009:

A  Gallup Poll conducted in early October 2009 said one possible explanation for the surge in gun and ammunition sales could be that more than 50% of the Americans who owned guns and some 41% of all Americans believed that President Obama would "attempt to ban the sale of guns in the United States while he is president."

Data from the first six months of FY 2010 report a 56.5% increase (to $12.1 billion) in the amount of sin taxes.  Most of the increase again was the result of the higher tobacco taxes.  Firearms and ammunition excise taxes fell 8.4%.

National Taxpayer Advocate Releases Report to Congress

National Taxpayer Advocate Nina E. Olson yesterday released (IR-2010-83) her mid-year repoert to Congress, Fiscal Year 2011 Objectives.

• Forbes, Will Bad History Repeat With Congress And The IRS?
• Tax Lawyer's Blog, Taxpayer Advocate Nina Olson Concerned that Burden of New 1099 Reporting Will Exceed Benefits
• USA Today, Small Businesses, Charities Face More Reporting Rules
• Wall Street Journal, U.S. Business Faces Burden From New IRS Rules—Report
• Wall Street Journal Blog, Taxpayer Advocate Warns on New IRS Duties
• Washington Post, Health Care Law May Pose Challenges for IRS, Taxpayers
• WebCPA, Taxpayer Advocate Concerned about 1099 Reporting

GAO Issues Report on IRS's Internal Controls

The Government Accountability Office yesterday released Status of GAO Financial Audit and Related Financial Management Report Recommendations (GAO-10-597):

IRS has made progress in improving its internal controls and financial management since its first financial statement audit in 1992, as evidenced by 10 consecutive years of clean audit opinions on its financial statements, the resolution of several material internal control weaknesses, and actions resulting in the closure of over 250 financial management recommendations. This progress has been the result of hard work throughout IRS and sustained commitment at the top levels of the agency. However, IRS still faces significant financial management challenges in (1) resolving its remaining material weaknesses in internal control, (2) developing outcome-oriented performance metrics, and (3) correcting numerous other internal control issues, especially those relating to safeguarding tax receipts and taxpayer information. At the beginning of GAO’s audit of IRS’s fiscal year 2009 financial statements, 62 financial management–related recommendations from prior audits remained open because IRS had not fully addressed the issues that gave rise to them. During the fiscal year 2009 financial audit, IRS took actions that GAO considered sufficient to close 18 recommendations. At the same time, GAO identified additional internal control issues resulting in 41 new recommendations. In total, 85 recommendations remain open.

TIGTA: Has IRS Achieved Goals of 1998 Restructuring and Reform Act?

The Treasury Inspector General for Tax Administration today released its evaluation of whether the goals of the IRS Restructuring and Reform Act of 1998 (RRA 98) have been substantially achieved.   The Internal Revenue Service Restructuring and Reform Act of 1998 Was Substantially Implemented but Challenges Remain (2010-IE-R002):

RRA 98 was broadly scoped legislation intended to transform the IRS into a modern financial services organization. It called for reform of virtually every aspect of the IRS, including its reorganization from a geographically based organization to one that was focused primarily on providing taxpayers with customer service similar to that available from many private sector financial institutions, including electronic access to customer accounts.

TIGTA reviewed the IRS’s implementation of the major tax provisions of the law. This review included extensive research of: the law, relevant IRS Internal Revenue Manuals, the IRS Intranet website, prior reports by TIGTA and other relevant organizations including the Government Accountability Office. It further reviewed IRS strategy and policy, processes and procedures, information technology and employee/human capital to gauge IRS’s success at implementing the law.

"While the IRS has made significant strides in transforming into a modern financial services organization, our review found that major challenges remain," said J. Russell George, Treasury Inspector General for Tax Administration. "Much of this reform effort remains a work in progress," he added.

As part of the transformation process, the IRS created a new mission statement focusing on taxpayer service and adopted the new organizational performance measures of business results, customer satisfaction, and employee satisfaction. The IRS further implemented safeguards to ensure that enforcement statistics would no longer be used as a basis for employee evaluations, and engaged in efforts to modernize its computer technology and its business systems. Expanded electronic filing, creation of an extensive Web site (www.IRS.gov), and installation of a state-of-the-art telephone routing system to more effectively and efficiently answer taxpayer calls were all part of this transformation. In addition, 71 taxpayer protections and rights required by the RRA 98 were engineered into operational processes and procedures

TIGTA’s review found that additional work is needed to complete IRS’s Business Systems Modernization effort. In addition, human capital management challenges remain, including replacement of an aging workforce, measurement of training effectiveness, and implementation of a performance-based pay system.

Open CRS Releases Tax Reports

• Tax Options for Financing Health Care Reform (R40648)
• The Role of Federal Gasoline Excise Taxes in Public Policy (R40808)
• Dependent Care: Current Tax Benefits and Legislative Issues (RS21466)

Taxing Arizona: IRS Refuses TIGTA's Recommendation That it Verify Citizenship of 200,000 e-File Providers

The Treasury Inspector General for Tax Administration (TIGTA) today released The Screening and Monitoring of E-File Providers Has Improved, but More Work Is Needed to Ensure the Integrity of the E-File Program (2010-40-042):

The primary means by which the IRS regulates electronic filing (e-file) Providers are the application screening process and the monitoring program.  ...  Inadequate screening and monitoring increases the risk to both the taxpaying public and the Federal Government for potential losses associated with unscrupulous e‑file Providers.

The IRS has improved its screening of individuals and organizations applying to become electronic filing (e-file) providers, but it needs to monitor them more carefully, according to a new report publicly released today by TIGTA.

The IRS’s electronic filing (e-file) program enables taxpayers to send their returns to the IRS in an electronic format via an authorized e-file provider. The primary means by which the IRS regulates e-file providers is by screening applicants and monitoring compliance with program requirements. As of June 21, 2009, there were 207,419 Electronic Return Originators (EROs) who e-filed about 61 million (66 percent) of the approximately 92 million e-filed tax returns accepted in 2009. EROs originate the electronic submission of income tax returns to the IRS that are either prepared by the ERO or received from a taxpayer.

TIGTA evaluated whether the IRS effectively screens and monitors of e-file providers. To become an e-file provider, an applicant must meet required screening and verification checks. Applicants must be U.S. citizens or legal aliens and at least 21 years of age. An applicant who is not an attorney, Certified Public Accountant, or an enrolled agent must supply a fingerprint card, which is used to conduct a criminal background check.

While the IRS has an effective process for ensuring applicants meet age requirements and have no tax compliance issues, TIGTA found that the IRS is not consistently verifying that new applicants are U.S. citizens or legal aliens authorized to work in the United States. ...

TIGTA made six recommendations to the IRS, including that it ensure that citizenship ... status [is] verified for all e-file program applicants. ... The IRS agreed with all but one of TIGTA’s six recommendations. It disagreed with TIGTA’s recommendation that it verify citizenship because concerns that pending legislation mandating e-file for most return preparers will require the IRS to modify current citizenship rules. TIGTA said the IRS should continue to ensure that all U.S. based e-file Providers should have a valid Social Security Number and pass a citizenship test.

GAO: IRS Can't Track Nonresident Alien Tax Noncompliance

The Government Accountability Office yesterday released IRS May Be Able to Improve Compliance for Nonresident Aliens and Updating Requirements Could Reduce Their Compliance Burden (GAO-10-429):

For tax year 2007, nonresident alien individuals filed about 634,000 Forms 1040NR, the U.S. Nonresident Alien Income Tax Return. IRS has not developed estimates for the extent of nonresident alien tax noncompliance because it often lacks information to distinguish between nonresident aliens and other filers, and examinations can be costly and difficult since many nonresident aliens would depart the country before IRS could examine their returns.

See WebCPA, IRS to Improve Nonresident Alien Tax Compliance.

CBO: 'Nearly All' Colleges Engage in Tax Arbitrage

The Congressional Budget Office on Friday released Tax Arbitrage by Colleges and Universities:

Because colleges and universities serve a public purpose—advancing higher education and promoting myriad forms of research—they enjoy a variety of tax preferences. In addition to being exempt from paying federal income taxes, institutions of higher learning can accept tax-deductible charitable contributions and use tax-exempt debt to finance capital expenditures. It is the latter preference that the CBO focuses on in this study, which was prepared at the request of the Ranking Member of the Senate Finance Committee. The law explicitly prohibits the use of tax-exempt-bond proceeds for the purchase of investment assets, a practice known as tax arbitrage; however, issuers of tax-exempt bonds may use the proceeds for the purchase of operating assets while they simultaneously hold investment assets that provide a higher rate of return. To the extent that colleges and universities earn an untaxed return on investments that exceeds the interest they pay on tax-exempt debt, they are benefiting from a form of indirect tax arbitrage.

Using data from information returns filed with the IRS by institutions of higher learning and by issuers of tax-exempt debt, CBO created several measures of tax arbitrage under a broader definition of the term that includes indirect tax arbitrage. Over time, if legislators were to expand the definition of tax arbitrage, nonprofit institutions would most likely respond by reducing their issues of tax-exempt debt. That response, in turn, could decrease the cost to the federal government of granting such tax preferences.

• CBO Director's Blog, Tax Arbitrage by Colleges and Universities
• Senator Charles Grassley Press Release, Tax Arbitrage by Colleges, Universities Raises Questions
• Bloomberg, Colleges Profit by Selling Tax-Exempt Debt, CBO Says
• Chronicle, Senator Questions Another Break for Colleges: Tax-Exempt Bonds
• Inside Higher Ed, More Scrutiny for Colleges' Business Practices
• New York Post, Colleges' Tax-Free Bond Boon

Joint Tax Committee Releases IRS Disclosures of Tax Return Information, 2009

The Joint Committee on Taxation yesterday released Disclosure Report for Public Inspection Pursuant to Internal Revenue Code Section 6103(p)(3)(C) for Calendar Year 2009 (JCX-25-10):

Section 6103(p)(3)(C) of the Internal Revenue Code provides that the Secretary of the Treasury shall, within 90 days after the close of each calendar year, furnish to the Joint Committee on Taxation for disclosure to the public a report which provides, with respect to each Federal agency and certain other entities, the number of: (1) requests for disclosure of returns and return information (as such terms are defined in section 6103(b)); (2) instances in which returns and return information were disclosed pursuant to such requests or otherwise; and (3) taxpayers whose returns, or return information with respect to whom, were disclosed pursuant to such requests.In addition, the report must describe the general purposes for which such requests were made.

Pursuant to section 6103(p)(3)(C), the Internal Revenue Service prepared a disclosure report for public inspection covering calendar year 2009. This document sets forth the report of the IRS.

The report reveals that the IRS made 7.6 billion disclosures of tax return information to federal and state agencies (up from 5.3 billion in 2008 and 4.5 billion in 2007). Here are the Top 5 recipients of taxpayer information:

1. States: 4,846,131,877 disclosures
2. Bureau of Census: 1,349,028,710 disclosures
3. Congressional Committees: 1,326,054,627  disclosures
4. Medicare Premium Subsidy Adjustment: 39,031,057 disclosures
5. Child Support Enforcement Agencies: 16,418,936 disclosures

Joint Tax Committee: IRS Lacks Authority to Enforce ObamaCare's Individual Mandate

Big Government, Joint Committee on Taxation Confirms that ObamaCare Does Not Enforce Individual Mandate:

One of the more controversial elements of ObamaCare is the mandate for most individuals to purchase insurance beginning in 2014. There is really no precedent for a federal mandate of this scale requiring individuals to purchase a product or service. So not surprisingly a number of state Attorney Generals have indicated they will be filing suit questioning the constitutionality of this provision. ...

Republicans for their part have focused on the fact that this mandate will be enforced via threat of a financial penalty (or tax), with the added assumption that it is the dreaded IRS which will be enforcing this. And sure enough, it’s already been reported that the IRS anticipates hiring possibly in excess of 15,000 additional personnel to deal with the collection of the individual mandate, and other tax related provisions within the bill.

However, it turns out that the Democrats who crafted this bill significantly – and I mean significantly – hamstrung the ability of the IRS or any other federal agency to enforce or collect on this mandate. Here is what the federal Joint Committee on Taxation had to say about this issue in a report released earlier this week:

Individuals who fail to maintain minimum essential coverage in 2016 are subject to a penalty equal to the greater of: (1) 2.5% of household income in excess of the taxpayer’s household income for the taxable year over the threshold amount of income required for income tax return filing for that taxpayer under section 6012(a)(1); or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee for an adult. The total household penalty may not exceed 300 percent of the per adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for bronze level health plan offered through the Exchange that year for the household size…

The penalty applies to any period the individual does not maintain minimum essential coverage and is determined monthly. The penalty is assessed through the Code and accounted for as an additional amount of Federal tax owed. However, it is not subject to the enforcement provisions of subtitle F of the Code. The use of liens and seizures otherwise authorized for collection of taxes does not apply to the collection of this penalty. Non-compliance with the personal responsibility requirement to have health coverage is not subject to criminal or civil penalties under the Code and interest does not accrue for failure to pay such assessments in a timely manner.

According to a footnote in the report, “subtitle F of the Code” is the portion of the tax code which grants the IRS the authority to assess and collect taxes. In other words, as the law is written the federal government has no legal authority to enforce this mandate, nor will it have any recourse to collect any penalties that go unpaid!

• The Atlantic, Can the Individual Mandate Be Enforced?
• Going Concern, The IRS Will Enforce Mandatory Healthcare Using the Honor System
• InstaPundit, So, Is This Good News or Bad?
• Marginal Revolution, How Mandate Penalties Will be Enforced
• Reason, Insurance Death Spiral, Here We Come!
• Roth & Co., The Toothless Tax Bandwagon

Candidate Obama opposed an individual mandate during the presidential campaign:

Joint Tax Committee Releases Report on Manager’s Amendment to H.R. 4849

The Joint Committee on Taxation today released A Description of the Revenue Provisions Added or Modified by the Manager’s Amendment to H.R. 4849 (JCX-21-10):

The manager’s amendment modifies section 306 of H.R. 4849, relating to the availability of collection due process rights with respect to levies for tax liabilities of Federal contractors, adds a provision to disqualify crude tall oil from the cellulosic biofuel producer credit, and increases the corporate estimated tax payments otherwise due for certain periods.

Joint Tax Committee Releases The 2010 and 2011 Tax Law

The Joint Committee on Taxation today released Present Law and Background Data Related to the Federal Tax System in Effect for 2010 And 2011 (JCX-19-10), in advance of tomorrow's House Ways & Means Committee hearing on Taxes and the Budget:

The current Federal tax system has four main elements: (1) an income tax on individuals and corporations (which consist of both a “regular” income tax and an alternative minimum tax); (2) payroll taxes on wages (and corresponding taxes on self-employment income); (3) estate, gift, and generation-skipping transfer taxes; and (4) excise taxes on selected goods and services.

In addition to the expiration of temporary provisions of Federal tax law, a number of aspects of the Federal tax laws are subject to change over time. For example, some dollar amounts and income thresholds are indexed for inflation. The standard deduction and the individual income tax rate brackets are examples of amounts that are indexed for inflation. The amount of earnings subject to the Social Security tax is adjusted annually for wage growth. In general, the Internal Revenue Service adjusts these numbers annually and publishes the inflationadjusted amounts in effect for a tax year prior to the beginning of that year. Where applicable, this document generally includes dollar amounts in effect for 2010 (or 2011) and notes whether dollar amounts are indexed for inflation.

President Obama Calls for 'Restoring Balance to the Tax Code'

The White House today released the 458-page 2010 Economic Report of the President, which includes a 4-page section on Restoring Balance to the Tax Code:

The second major step the Administration is taking to address the long-run fiscal challenge is restoring balance to the tax code that has been lost since 2001. The 2001 and 2003 tax cuts disproportionately favored wealthy taxpayers. ... These tax cuts for the wealthiest Americans took place when the incomes of ordinary Americans were stagnating and inequality was reaching almost unprecedented levels. In other words, the tax cuts exacerbated the broader trend rather than mitigated it.

The President has consistently maintained that the tax cuts went too far in cutting taxes for people making more than $250,000 per year and that the country could not afford the tax breaks given to that group over the past eight years. That is why one important plank of his fiscal responsibility framework is to rebalance the tax code, so that it is similar to what existed in the late 1990s for those making more than $250,000 per year. Specifically, the Administration has proposed letting the marginal tax rates on ordinary income and capital gains for people making more than $250,000 per year return to the levels they were in 2000. It has also proposed setting the tax rate on dividends for high-income taxpayers to the same 20% rate that would apply to capital gains—which is lower than the rate in the 1990s—and letting all other features of the 2001 and 2003 tax cuts expire for these taxpayers. In addition, it has proposed limiting the rate of deductions for high-income taxpayers to 28%, so that the wealthy do not obtain proportionately larger benefits from their deductions than other Americans do. None of these changes would take effect until 2011, so they would not affect disposable incomes as the economy recovers in 2010. Nonetheless, they would raise nearly $1 trillion over the next 10 years and even more over the longer run.

 
 

CBO: Policy Options to Boost Employment

The Congressional Budget Office yesterday released Policies for Increasing Economic Growth and Employment in the Short Term:

This testimony summarizes the outlook for the labor market and assesses the potential impact that a variety of policy options would have on economic growth and employment. Some of the options that CBO analyzed would reduce taxes on individuals or increase aid to the unemployed and others, thereby increasing households’ disposable income and boosting demand. Other policies would increase the flow of cash and reduce taxes for businesses, which would encourage them to invest and hire and thus increase employment. Additional options would increase federal spending by investing in infrastructure or providing aid to state governments, which would strengthen demand for goods and services and reduce further losses of state and local government jobs.

CBO concludes that further policy actions, if properly designed, would promote economic growth and increase employment in 2010 and 2011. The policies analyzed vary in cost-effectiveness as measured by the cumulative effects on GDP and employment per dollar of budgetary cost and in the timing of those effects. Policies that could be implemented relatively quickly or targeted toward people whose consumption tends to be restricted by their income, such as reducing payroll taxes for firms that increase payroll or boosting aid to the unemployed, would have the largest effects on output and employment per dollar of budgetary cost in 2010 and 2011. By contrast, policies that temporarily increased the after-tax income of people with relatively high income, such as an across-the-board reduction in income taxes or an increase in the exemption amount for the alternative minimum tax (AMT), would have smaller effects because such tax cuts would probably not affect the recipients’ spending significantly.

 

Obama's Budget 'Cheats' (by $98 Billion) in Reporting Cost of Child Tax Credit & EITC Expansion

The Committee for a Responsible Federal Budget:

A few months ago, we pointed out that the Administration was cheating in its Mid-Session Review budget baseline. Essentially it was taking policies which President Obama had signed into law as temporary, under the stimulus bill, and assuming them as permanent. The implication being that, if the policies were a part of the baseline, they wouldn't need to be paid for when enacted. ...

[T]he Administration says it should be able to measure its policies off of a "current policy" baseline. We disagree; if President Obama wants to extend the Bush tax cuts -- the same ones which he criticized the Bush Administration for not paying for -- he should have to offset them, or else fess up to using them to increase our debt.

But let's accept, for the sake of argument, that the Administration should be allowed to budget from a current policy baseline. Even in that case, they are cheating.

The Administration is taking two tax provisions from the 2009 stimulus bill -- expansions of the child tax credit and the EITC -- and claiming them as part of the "current policy" Bush tax cuts. ...

The Administration didn't inherit these policies, they created them. And worse, still, they created them as explicitly temporary, under a stimulus bill which they claimed was meant only to help bring us out of this recession.

Yet the White House wants to continue these policies, and they don't want to pay for them. So what do they do? They hide these policies in their baseline, in the hopes that they won't have to. ... For the tax cuts, as Bob Williams of TPC points out, they don't show this until "footnote 5 on page 170 of Analytical Perspectives."

So how much money is involved here? Well, putting these measures into the baseline makes the President's tax cuts for families appear to cost $143 billion over ten years, when they actually cost $241 (excluding the Bush tax cuts).

(Hat Tip: Greg Mankiw.)

CRS: Business Investment and Employment Tax Incentives to Stimulate the Economy

Open CRS has posted Business Investment and Employment Tax Incentives to Stimulate the Economy (R41034).  Here is the summary:

According to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the U.S. economy has been in recession since December 2007. Congress passed and the President signed an economic stimulus package, the American Recovery and Reinvestment Act of 2009 (P.L. 111-5), in February 2009. The $787 billion package included $286 billion in tax cuts to help stimulate the economy. Among the tax reductions, many were tax incentives directed to business. The preliminary estimate of third quarter real gross domestic product (GDP) growth is 2.8%; the unemployment rate, a lagging indicator, averaged 9.6% in the third quarter and 10.0% in the fourth quarter of 2009. Federal Reserve Chairman Ben Bernanke expects the economy to continue growing at a modest pace, but predicts that bank lending will remain constrained and the job market will remain weak into at least 2010. To further assist unemployed workers, help business, and stimulate housing markets, Congress passed the Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92). The Obama Administration has advocated further business tax incentives to spur investment and employment, especially for small business. The two most common measures to provide business tax incentives for new investment are investment tax credits and accelerated deductions for depreciation. The evidence, however, suggests that a business tax subsidy may not necessarily be the best choice for fiscal stimulus, largely because of the uncertainty of its success in stimulating aggregate demand. If such subsidies are used, however, the most effective short-run policy is probably a temporary investment subsidy. Permanent investment subsidies may distort the allocation of investment in the long run. Employment and wage subsidies are designed to increase employment directly by reducing a firm's wage bill. The tax system is a frequently used means for providing employment subsidies. Most of the business tax incentives for hiring currently under discussion are modeled partially on the New Jobs Tax Credit (NJTC) from 1977 and 1978. Evidence provided in various studies suggests that incremental tax credits have the potential of increasing employment, but in practice may not be as effective in increasing employment as desired. There are several reasons why this may be the case. First, jobs tax credits are often complex and many employers, especially small businesses, may not want to incur the necessary record-keeping costs. Second, since eligibility for the tax credit is determined when the firm files the annual tax return, firms do not know if they are eligible for the credit at the time hiring decisions are made. Third, many firms may not even be aware of the availability of the tax credit until it is time to file a tax return. Lastly, product demand appears to be the primary determinant of hiring.

President Obama's Budget Contains $1.9 Trillion in Tax Increases

President Obama today released his administration's Fiscal Year 2011 Budget.  The Treasury Department released its 153-page Green Book, General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals.  From the Treasury Department's press release:

"This set of tax reforms strikes a balance between targeted tax cuts to spur investments in job growth and innovation here at home, middle class tax relief to make our tax system more fair, measures to crack down on abuses that send jobs overseas, and long-term fiscal discipline."
-- Treasury Secretary Tim Geithner

Press and blogosphere coverage of the tax proposals:

• Associated Press, Obama Budget Would Impose Host of Tax Increases
• ataxingmatter, Obama's FY 2011 Budget
• Bloomberg, Obama Budget Drops Plan for $87 Billion Tax Rise on Companies
• Bloomberg, Obama Seeks $1.9 Trillion Tax Rise on Rich, Business
• Dow Jones, Obama Budget Includes $400 Billion In Business Tax Hikes
• Reuters, Obama Tones Down International Corporate Tax Aims
• TaxVox, Obama’s Mind-numbing Budget
• Wall Street Journal, Budget Would Raise Tax Rates on Wealthy, Limit Deductions
• Wall Street Journal, Plan Would Raise Taxes on Businesses

Joint Tax Committee Releases List of Expiring Federal Tax Provisions, 2009-2020

The Joint Committee on Taxation yesterday released List of Expiring Federal Tax Provisions 2009-2020 (JCX-3-10):

This document, prepared by the staff of the Joint Committee on Taxation, provides a listing of Federal tax provisions (other than those providing time-limited transition relief after the repeal of an underlying rule) that are currently scheduled to expire in 2009-2020 (with references to the applicable section of the Internal Revenue Code of 1986 or other applicable law). Expiring Federal tax provisions providing temporary disaster relief are separately listed in Part II of the document.

For purposes of compiling this list, the staff of the Joint Committee on Taxation considers a provision to be expiring if, at a statutorily specified date, the provision expires completely or reverts to the law in effect before the present-law version of the provision. Certain provisions terminate on dates that refer to a taxpayer’s taxable year and not a calendar year. For these provisions, the expiration dates listed in this document apply with respect to calendar year taxpayers. The expiration dates of such provisions may differ, however, with respect to fiscal year taxpayers or taxpayers with short taxable years.

GAO Issues Report on New Markets Tax Credit

The Government Accountability Office yesterday released New Markets Tax Credit: The Credit Helps Fund a Variety of Projects in Low-Income Communities, but Could Be Simplified (GAO-10-334):

The Treasury Department’s Community Development Financial Institutions (CDFI) Fund awarded $26 billion in New Markets Tax Credits (NMTC) through 2009 for investment in low-income communities. The NMTC allows investors to claim a tax credit totaling 39% of their investment in Community Development Entities (CDE) over 7 years which CDEs reinvest in qualified communities.

This mandated report (1) describes where and how CDEs are using NMTCs, (2) assesses how CDEs use NMTCs to offer favorable financing terms to low-income community businesses and describes options for simplifying the NMTC, (3) describes how, if at all, NMTC investments support low-income community development, and (4) determines how effective IRS and the CDFI Fund have been in monitoring NMTC compliance. GAO analyzed CDFI Fund and CDE data, did case studies of CDEs, and interviewed relevant experts.

President Obama Calls for TARP Tax on Big Banks

• White House Press Release
• White House Fact Sheet
• Treasury Department Press Release
• Treasury Department Example
• The Atlantic
• Bloomberg
• The Conglomerate (and here, here, here, and here)
• Deal Book (NY Times)
• Deal Journal (WSJ)
• Dorf on Law
• Financial Times
• FindLaw
• Forbes
• New York Times
• Tax.com
• Wall Street Journal

GAO: 68% of S Corp Tax Returns Have Errors

The Government Accountability Office today released Tax Gap: Actions Needed to Address Noncompliance with S Corporation Tax Rules (GAO-10-195):

According to IRS data, about 68% of S corporation returns filed for tax years 2003 and 2004 (the years data were available) misreported at least one item. About 80% of the time, misreporting provided a tax advantage to the corporation and/or shareholder. The most frequent errors involved deducting ineligible expenses, which could decrease S corporation shareholder tax liabilities. Even though a majority of S corporations used paid preparers, 71% of those that did were noncompliant. Stakeholder representatives said that preparer mistakes may be due to the lack of preparer standards as well as their misunderstanding of the tax rules. Shareholders of S corporations also made mistakes in calculating basis – their ownership share of the corporation – when taking losses passed to them from the corporation, potentially decreasing their total taxes. IRS officials as well as stakeholder representatives said that calculating and tracking basis was one of the biggest challenges for shareholders, and that S corporations themselves were in a better position in most cases to calculate basis for their shareholders.

To improve compliance with shareholder basis rules, Congress should require S corporations to calculate and report shareholder’s stock and debt basis as completely as possible. S corporations would report the calculation on the Schedule K-1 and send it to shareholders as well as IRS. If Congress judges that stock purchase price information that is currently only available to shareholders should not be transmitted to the S corporation due to privacy concerns, an alternative is to require that S corporations report less complete basis calculations using information already available to the S corporation.

To help address the compliance challenges with S corporation rules, we recommend that the Commissioner of Internal Revenue take the following four actions:

• Identify and evaluate options for improving the performance of paid preparers who prepare S corporation returns, such as licensing preparers and ensuring that appropriate penalties are available and used.
• Send additional guidance on S corporation rules and record-keeping requirements to new S corporations to distribute to their shareholders, including providing guidance on calculating basis and directing them to the specific IRS Web site related to S corporation tax rules.
• Require examiners to document their analysis such as using comparable salary data when determining adequate shareholder compensation or document why no analysis was needed.
• Provide more specific guidance to shareholders and tax preparers, such as that provided to IRS examiners, on determining adequate shareholder compensation through means such as IRS’s Web site.

• Web CPA, GAO Sees Problems With S Corp Tax Compliance

GAO Offers Seven Improvements for 2010 Tax Filing Season

The Government Accountability Office criticized the IRS's telephone service to taxpayers during the 2009 tax filing season, "where, for a second year in a row, unanticipated increases in call volume significantly reduced performance, in part, because of inquires related to tax law changes."  The report makes seven recommendations for improvements for the 2010 tax filing season.  2009 Tax Filing Season: IRS Met Many 2009 Goals, but Telephone Access Remained Low, and Taxpayer Service and Enforcement Could Be Improved (GAO-10-225).