A nice rundown of the essential tax problems for a new business by Courtney Strutt Todd at the Davis Tax Law Blog.

Peter Fisher

Is the Iowa tax system better for business than its 41st place ranking in the Tax Foundation’s 2012 Business Tax Climate Index would indicate?  Iowa City’s Peter Fisher says so in the Des Moines Register: Iowa View: Why ignore Iowa’s pro-business tax climate?

Complaints about Iowa’s business tax system are puzzling, because businesses get a really good deal here.

First, as the Iowa Fiscal Partnership has shown, Iowa’s overall state and local taxes on business are lower than average. Only nine states take a smaller share of private-sector output in corporate income taxes.

So Iowa’s tax system is good because it’s ineffective.  Noted.  Later Mr. Fisher unwittingly gets to the real problem with Iowa corporate taxes.

We go through this every few years. Business lobbyists complain about Iowa’s corporate tax rates, but ignore the way they are applied. Iowa’s effective tax rate on businesses makes our state highly competitive with our neighbors. It’s Iowa’s great secret.

The problem with Iowa corporate taxes is that there are so many loopholes and special deals made for select companies. Many companies get away with paying no income tax and instead demand subsidy checks for many thousands and even millions of dollars.

With the highest corporation income tax rate in the nation — even after the 50% deduction for federal taxes that he points out — some businesses really get clobbered — particularly Iowa corporations selling primarily to Iowa customers.  The clobbered ones subsidize the ones that “get away with paying no income tax and instead demand subsidy checks for many thousands and even millions of dollars.”  That’s why the net corporate tax is a so small — the state only gets what’s left after it takes cash from the average taxpayer and transfers it to the well-connected ones with the “loopholes and special deals.”  It’s a textbook model of crony capitalism.

Mr. Fisher’s solution is not to alleviate the suffering, but to spread it around.  There is a better way.

When your employer doesn’t offer a “matching gifts” program, you aren’t allowed to start one by yourself.  SFGate.com reports on a man sentenced to five years in prison after stealing from his employer – and not putting the proceeds on his 1040:

U.S. District Judge Richard Young also ordered 54-year-old Richard E. Brown of Mount Vernon to pay a fine of $30,000 and nearly $190,000 in restitution and to serve three years supervised released after his prison term.

Prosecutors say Brown used his position as the office manager of Walker Investments in Evansville to pay his personal expenses with a company credit card and company checks to pay expenses of his church, Oak Hill Christian center in Evansville, where Brown was the bookkeeper.

It’s better to give than to receive, but receiving can be lucrative.  From therepublic.com:

The founder of USA Harvest was charged Wednesday with failing to pay taxes on $553,891.67 from 2005 through 2008 — including funds prosecutors say he stole from the charity and personal expenses he billed to the organization.             

In a bill of information, 63-year-old Hugh “Stan” Curtis of Louisville is charged with taking $183,354 in donations from the charity and charging $370,537.67 in personal travel expenses. He faces charges of mail fraud, money laundering and filing false income tax returns.

The story says that the organization takes extra foods from restaurants and other food service providers and delivers it to the hungry.

The group’s efforts have drawn assistance from the Goo Goo Dolls, who used to pick up food in their concerts in benefit of the organization and actress Scarlett Johansson, whose photo is featured on the organization’s web site.

Yes, this picture.

Per Diem rates updated.  The IRS has updated the “Special Per Diem Rates” for away-from-home expenses for taxpayers in the transportation industry (Notice 2012-63).  Taxpayers can use these rates in lieu of substantiating actual away from home business meal and lodging costs.The notice also provides the new incidentals-only amount ($5 per day) and the rates for “high-cost localities” for taxpayers in all industries.  The Journal of Accountancy has more.  The GSA web site has the rates nationwide.

Joseph Henchman,   Taxpayer Wins Against Washington State Shakedown; State Appeals (Tax Policy Blog)

TaxGrrrl, More Bogus IRS Emails Hit Inboxes

Courtey A. Strutt Todd,  How will the Expiration of the Bush Tax Cuts Affect Me? (Davis Brown Tax Law Blog)

Leaving Louisiana.  A New Orleans preparer gets a 92-month sentence for filing 635 returns claiming inflated deductions and credits (theadvocate.com)

Tax Trials,  Tax Court: Gross Receipts Must Include Interest & Investment Income for Research Tax Credit Calculation

Trish McIntire,   Out of Pocket Charity Deduction

Brian Strahle,  Kentucky Tax Amnesty Program begins October 1, 2012!

Jason Dinesen,  IRS E-Services and the TIGTA Report

Daniel Shaviro,  More honest than usual, but still not making sense

Kay Bell,  ‘Obama didn’t raise taxes’ and other Romney comments freaking out the GOP

Anthony Nitti,  Coloradans May Soon Be Able to Get High Without Having To First Pretend They Have Cataracts

News you can use:  WASTING VALUABLE TIME IS APPARENTLY A JOB REQUIREMENT FOR BEING A MEMBER OF CONGRESS (Robert D. Flach)

The Critical Question: Do Swinging Singles Have Any Chance At Making Partner in Public Accounting? (Going Concern).

Not a Registered Tax Return Preparer

Never defraud a mammoth.  Feds Charge Colleyville Pharmacist and Wife In Mammoth Tax Fraud Scheme (DallasObserver.com)

You use the information from the supporting documents to prepare the returns, not the other way around.  A former IRS agent-turned-preparer is in trouble after mixing up this basic rule of tax return preparation, reports the Hartford Courant.com (my emphasis):

A former IRS agent abruptly pleaded guilty to tax fraud Thursday, moments after a federal prosecutor accused him in an opening statement to jurors of claiming deductions that included the price of treats for his dog and a ring he was stuck with after a broken engagement.

Thomas Thorndike, 62, of Milford operated the profitable tax preparation and financial services business Cornerstone Financial Services in Woodbury after leaving the IRS.

Why was his business profitable?

Assistant U.S. Attorney Christopher M. Mattei told jurors Thursday that Cornerstone was a high volume, high profit business. During tax season, he said, Thorndike collected as much as $12,000 a day by preparing 40 returns daily, one every 15 minutes. The secret to high-volume was big refunds, Mattei said.

Impressive productivity.  How did he get the big refunds?

But Mattei said the audit showed that many refunds were based on unsupportable deductions for mileage and donations of old clothing. A Waterbury police officer reported commuting 4,000 miles to work in 2006. A high percentage of Thorndike clients reported giving between $3,000 and $4,000 in clothing to Goodwill Industries during the same year and had receipts purportedly signed by the same Goodwill employee.

Just an overworked Goodwill employee?  Maybe not:

When Thorndike learned the IRS was examining the returns, Mattei said he instructed clients to manufacture phony supporting documents.

Oops.  That’s definitely against the rules.  Many people think the charitable deduction for used clothing is a freebie deduction.  It’s not.  You need to document the deduction, and the clothing has to be at least in good used condition.  As this case shows, overdoing it can attract IRS attention.  And if you don’t have the documentation to start with, you can’t invent it later.

Tax Policy Blog  Chart of the Day: Payroll Taxes and Refundable Credits:

Water is wet, too. IRS Audits Deter Corporate Tax Avoidance. (TaxProf) 

A coveted heh for the Tax Update.

Brutal Assault on Reason Watch: 

Anthony Nitti,  Reactions to the Biden – Ryan Debate

TaxGrrrl,  Vice Presidential Debate, 2012 – Live Blog

David Hirsanyi,  Democrats Are the Real Tax Ideologues  (Reason.com)

Howard Gleckman,  Can Romney Cut Taxes for the Rich Without Reducing Their Share of Taxes? Yes, but….  (TaxVox)

Jason Dinesen,  IRS Releases FAQ for Same-Sex Married Couples:

It’s refreshing to see the IRS publish this FAQ. The IRS does a lot of things wrong, but on the topic of same-sex marriage, the IRS has been surprisingly open-minded.

Now if only the Iowa Department of Revenue would publish a similar FAQ — or give us SOMETHING.

Better specify that “something.”

Kay Bell,  Double check dependents, filing status

Jack Townsend,  Another Plea Related to Offshore Activity

Martin Sullivan,  Business Overstates Its Case on International Taxation

Courtney A. Strutt-Todd,  Using Tax-Exempt Bonds as a Way to Finance Your Next Project (Davis Brown Tax Law Blog)

Going Concern,  City of Detroit’s Finance Department Makes Case for Most Hysterically Pitiful Internal Control System in Recent Memory

The expectant crowd gathers in Ames, Iowa for the final 2012 session of the ISU Center for Agricultural Law and Taxation Farm and Urban Tax School. 

350 practitioners are signed up, and the coffee’s on!

Fiscal Cliff Notes

 Because writing big checks in April is always popular.  A few commenters have said that the Treasury Secretary can prevent Fiscal Cliff disaster by just setting the withholding tables to pretend that the tax law isn’t changing January 1.  Marie Sapirie of Tax Notes says it’s not that simple ($link)

Commentators have suggested that Geithner may even be able to prospectively implement the administration’s policy of raising taxes on taxpayers making more than $250,000 per year by increasing withholding only on income above that level. That is almost certainly wishful thinking. Whatever the “most appropriate” amount of withholding to reflect the tax rates in section 1 may be, section 3402(a) does not give the Treasury secretary the power to create withholding tables that have no basis in current or recently expired law.

Of course Secretary Geither hasn’t always been big on following the tax law.

TaxProf,  NY Times: Itemized Deduction Cap: Popular, But Unfair 

KayBell,   National Taxpayer Advocate Nina Olson discusses fiscal cliff tax complications

TaxGrrrl,  Budget Resolution May Come Down To One Question

Steven Rosenthal,  Paying Taxes on Capital Gains Early: How Investors are Avoiding Tax Hikes (TaxVox): “All of this planning suggests that sophisticated taxpayers are outracing Congress again.” 

Nick Kasprak,Alternative Minimum Tax Increase Looming Over Fiscal Cliff Negotiations (Tax Policy Blog)

Robert D. Flach,  WHAT FOOLS THESE POLITICIANS BE!

Remain calm, all is well.  Deficit Hysteria and Debt Denialism (Joseph Thorndike, Tax.com)

TaxProf,  Sullivan: Why the SALT Deduction Is Always Under Attack

Megan McArldle discusses an interesting pension funding approach:

Big news in pensions today: Silverdex, a major US-based conglomerate with fingers in just about every economic pie, from mining to solar cells, turns out to have been stuffing its main pension fund full of… it’s own corporate bonds

Just kidding. 

I don’t really know how to say this, but sorry, I lied a little bit.  I’m not talking about a private company at all, because of course, if a private company did this, it would be completely and totally illegal.  Regulators would have shut this down decades ago and probably at least a few lower-level executives would have spent a little time in the pokey.  Instead this is, of course, a description of how the United States Social Security “trust fund” works.

Like so many things: private sector does it, it’s scandal and ruin.  Government does it, it’s Tuesday.

Courtney A. Strutt-Todd,  Tax Law Blog: Attacks on the Exemption for Municipal-Bond Interest and Why it is Important to the Average Taxpayer (Davis Brown Tax Law Blog)

Paul Neiffer,  Another Nice Feature of a Living Trust

Brian Strahle,  D.C. Combined Reporting: How Much Will it Cost Your Company?

Missouri Tax Guy,   Capital Gains, What you need to know 

Trish McIntire links to the annoying new 2013 EIC Interview Sheet, so practitioners can double up as welfare caseworkers.

Russ Fox,  What Happens When Cigarette Taxes go Through the Roof?

Martin Sullivan,  Capital Gains Frustration for Tax Reformers (Tax.com).  His “reformers” want to increase the problems inherent in capital gains taxes by increasing them.  May their frustrations endure.

The Critical Question:  Naming Spousal IRAs After Senator Hutchison – Is That A Priority ?  (Peter Reilly)  I still think Roth & Company should get royalties for the Roth IRA…

Linda Beale,   Goggle’s Bermuda hideaway/HSBC’s too-big status: time to rein in the corporations!  Too big, eh?  Google’s entire market capitalization is about $234 billion this morning.  That’s how much the federal government spends in 23 days.  And it’s Google that’s too big? 

 Sorry, I think there’s already a mortgage on it.  A New Way to Reduce Our National Debt – Sell Alaska. (Greg Mankiw)

The Hoover Office Building, the warm and cuddly home of the Iowa Department of Revenue.

The Fiscal Cliff Bill complicates Iowa tax returns for 2012.  Iowa doesn’t automatically adopt federal tax law changes, so some retroactive tax law provisions in the Fiscal Cliff bill won’t apply to Iowa state income taxes absent action by the Iowa General Assembly.  From an Iowa Department of Revenue e-mail to practitioners yesterday:

The federal legislation passed on January 1, 2013 to avert the “fiscal cliff” included provisions for what are commonly referred to as the federal “extenders.” The federal “extenders” are not currently reflected on Iowa tax forms for 2012 and will require approval by the Iowa legislature before being allowed for Iowa tax purposes. Should legislative approval be given, Iowa online forms will be updated accordingly. The federal extender provisions include:

• Educator Expenses (Line 24; IA 1040)
• Tuition and Fees (Line 24; IA 1040)
• Itemized Deduction for State Sales /Use Tax Paid (Line 4; IA Schedule A)
• Treatment of mortgage insurance premiums as qualified residence interest (line 11, schedule A)
• The federal section 179 expensing limit of $500,000 for 2012 and 2013 

Iowa income tax returns must be filed based upon current Iowa law. Therefore, the extenders should not be included on Iowa returns at this time.

Let’s hope the legislature acts quickly to pass conformity legislation, or we will have another messy Iowa tax season.

Why 12%?  Today’s Des Moines Register story on reactions by Iowa business people to the Fiscal Cliff bill quotes me as saying that Iowa businesses may face a 12% reduction in their after-tax income.  Where did I get that number?

I started by computing the after-tax amount of a dollar earned by a top-bracket taxpayer under 2012 law, assuming full detectability of Iowa taxes on the federal return and vice-versa.  That results in a combined rate of 38.92%, leaving 60.18 cents in the taxpayer’s pocket.  Under the same assumptions using the 2013 39.6% top rate and the 3.8% surtax on “passive” income, the combined federal-state effective rate goes up to 46.39%, leaving 53.61 cents after-tax.  That’s a 7.48 cent reduction in after-tax income — 12.24% of the 60.18 cent 2012 after-tax number.

The 12.24% number is actually too low because it doesn’t account for the phase-out of itemized deductions for high-income taxpayers in the new bill.  For top-bracket taxpayers, itemized deductions will be reduced 3 cents for each additional dollar of income.  The result is a hidden 1.188% additional tax.  Plugging that into our tax computation gives a combined federal and Iowa rate of 47.46%, leaving 52.54 cents after-tax.  That reduces after tax income from 2012 law by 8.54 cents, or 13.99%.

Should I assume the 3.8% passive income tax, like I do in the above examples?  It won’t apply to K-1 income if all owners “materially participate” in a pass-through business.  Those taxpayers face “only” an 8.41% reduction in their after-tax income.  If you don’t think that’s significant, consider whet your reaction would be if your employer said that your after-tax pay was going down that much.

But the 3.8% tax will apply to family members that don’t participate in the business, like out-of-town siblings, retired founders, or children of owners.  The business has to distribute at least enough to let owners pay their taxes, which means the taxpayer in the highest bracket has to be covered.  For that reason many family-owned businesses will have to distribute enough to cover the 3.8% Obamacare net investment income tax, making the combined 47.46% rate their real rate.

Fiscal Cliff Notes

TaxProf,  House Approves Fiscal Cliff Tax Deal

Megan McArdle, After the Fiscal Cliff: What do Democrats Want?  “I submit that just as Republicans are more interested in entitlement cuts as talking points than as actual new laws, Democrats will prove much more interested in tax hikes in theory than in practice.”

Robert D. Flach, THE AMERICAN TAXPAYER RELIEF ACT OF 2012

William McBride, Fiscal Cliff Resolved, Still Likely to Get Downgraded

TaxGrrrl, The World Will Keep Turning, Even With The Expiration Of The Payroll Tax Cuts

Patrick Temple-West, Cliff bill means some pay more taxes, and more

Trish McIntire, American Taxpayer Relief Act of 2012

Paul Neiffer, Help! What Is My Capital Gains Tax Rate?!

Kay Bell,  What’s your 2013 tax rate and other fiscal cliff tax bill questions

Margaret Van Houten,  Estate and Gift Law Tax Aspects of Fiscal Cliff Legislation (Davis Brown Tax Law Blog)

Courtney A. Strutt Todd,  A Permanent Fix to the AMT Problem (Davis Brown Tax Law Blog)

Jana Luttenegger, Individual Tax Rates, Deductions, and Credits (Davis Brown Tax Law Blog)

Greg Mankiw has a pithy post that I hope he doesn’t mind me reproducing in full:

Here are the effective federal tax rates (total taxes as a percentage of
income) for 2013 under the new tax law, as estimated by the Tax Policy Center, for various income groups:

Bottom fifth: 1.9
Second fifth: 9.5
Middle fifth: 15.6
Fourth fifth: 19.0
Top fifth: 28.1

80-90 percentile: 21.5
90-95 percentile: 23.4
95-99 percentile: 26.3
Top 1 percent: 36.9
Top 0.1 percent: 39.6

Russ Fox,  Your Mileage Log: Start It Now!  Great advice.  If you travel on business and the IRS comes by, you’ll be glad you have that log.

David Brunori,   Only Tax Professionals Benefit from the State Corporate Tax.  (Tax Analysts Blog) Well, the loophole lobbyists do pretty well by it too.

Peter Reilly, Form 8332 – Don’t Let The Kids Live In Another Home Without One ?

TaxTV, IRS Penalty Relief-First Time Penalty Abate Program

Robert Goulder, The Unspoken Tax Expenditure (Tax Analysts Blog)

Jack Townsend, New Article on the Emerging Consensus for Taxing Offshore Accounts

William Perez,  Social Security Tax For 2013

Career planning news you can use:  Life After Public Accounting: Harassing Auditors For a Living Isn’t a Bad Gig If You Can Get It  (Going Concern)

So preparer regulation wasn’t really the solution?  Taxpayer Advocate Nina Olson says tax complexity is the biggest problem for taxpayers in her annual report:

The most serious problem facing taxpayers — and the IRS — is the complexity of the Internal Revenue Code (the “tax code”). Among other things, the tax code:

-Makes compliance difficult, requiring taxpayers to devote excessive time to preparing and filing their returns;

- Requires the significant majority of taxpayers to bear monetary costs to comply, as most taxpayers hire preparers and many other taxpayers purchase tax preparation software;

- Obscures comprehension, leaving many taxpayers unaware how their taxes are computed and what rate of tax they pay;

- Facilitates tax avoidance by enabling sophisticated taxpayers to reduce their tax liabilities and by providing criminals with opportunities to commit tax fraud;

- Undermines trust in the system by creating an impression that many taxpayers are not compliant, thereby reducing the incentives that honest taxpayers feel to comply; and

- Generates tens of millions of telephone calls to the IRS each year, overburdening the agency and compromising its ability to provide high-quality taxpayer service.

What do you suppose clued her in?

The byzantine complexity of the tax law is indeed the biggest problem facing the taxpayer.  She also prominently mentions the identity theft epidemic, preparer fraud and IRS funding.  One item not identified as a serious problem?  Unregistered tax preparers.

Just a few short years ago, Nina Olson had this to say:

 I have recommended the regulation of unenrolled return preparers since my 2002 Annual Report to Congress, and reiterated and supplemented that recommendation in successive reports.  My office was very much involved in  the analysis and discussions resulting in the IRS report, and I applaud Commissioner Shulman’s leadership in undertaking this significant review.

So what has that accomplished?  The IRS has tacitly admitted the program isn’t working by waiving the continuing education requirement.  The population of preparers is poised to crash.  That will raise the cost of tax preparation, forcing many to self-prepare and driving others out of the system entirely.  Meanwhile, one reason IRS resources are unavailable for taxpayer service is that they are directed to mismanaging preparer regulation.

The problem has always been tax complexity, and it continues to get worse.  No preparer regulation will change that.  The Taxpayer Advocate’s previous preparer regulation efforts only served to enrich the national tax prep franchises and distract from the real problem of complexity while damaging the ability of the IRS to serve taxpayers.

More on the Taxpayer Advocate report:

Robert D. Flach, NINA OLSEN ON THE DREADED AMT

Russ Fox, “The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft”

Jack Townsend,  TA Report Identifies IRS’ OVDP / OVDI As Problem

Scott Drenkard, Nobel Laureate James Buchanan Passes Away at 93 (Tax Policy Blog):

Buchanan’s model of government action was based on a theory of “politics  without romance,” which contended that policymakers act in their own self-interest the same way that market actors do. This means that politicians are not enlightened, selfless despots, and respond to the incentives of the political sphere, making policy that will help get them re-elected. Often the best way to do that is by catering to special  interests. The longer I work in this city, the more I see this observation as true to life.

This is (to me) the essence of the “Public Choice” analysis of government, created by Mr. Buchanan and Gordon Tullock.  It explains why passing a law or creating a regulation rarely solves the problem, and instead enables the well-connected to use the government as a club against their rivals.  The tax preparer regulations, literally authored by a former H&R Block CEO, are a classic example.  James Buchanan’s legacy is a valuable and too-little-heeded caution against increasing the role of government.

More: Alex Tabarrok,  James Buchanan (1919-2013), Appreciations; David Henderson, Further Notes on James Buchanan

TaxGrrrl, Leadership Shakeup At Treasury May Signal Change in Obama’s Fiscal Strategy

Courtney Strutt Todd:  Buying a House in 2013? You Could Qualify for a Federal Tax Credit up to $2,000 a Year for the Life of Your Mortgage! (Davis Brown Tax Law Blog)

Paul Neiffer,  IRS Announces When Returns Can Be Filed

Kay Bell, IRS will begin accepting 2012 tax returns on Jan. 30

William Perez, When Can You Begin Filing Your 2012 Federal Tax Return?

Brian Strahle,  Medical Device Excise Tax:  Ready or Not, It’s Here!

Nanette Byrnes, Virginia plan to end gas tax quickly panned (Tax Break)

The Critical Question: What Is It About Hollywood? (Cara Griffith, Tax.com)