Our Taxing Times

Max and Dave Looking for Reform

Tax reform is like the weather. A lot of people talk about it but no one really does anything about it. That may be changing.

In the last few years there has been a lot of discussion about the need for serious tax reform. Advocates of reform point to the size of the tax code and how few people can prepare their own tax return without professional help. The IRS has been forced into a social services role on top of their tax collection duties. It would seem to be a no brainer that some tax reform is needed. The practicality, however, is whether in this age of out of control partisan politics and lobbyist controlled legislation any true reform can happen.

Sen. Max Baucus (D-MT) and Rep. Dave Camp (R-MI) believe that tax reform is possible and they have taken the fight to the American public. They’ve created a website to involve taxpayers in the tax reform process. At taxreform.gov, the Congressmen outline why they believe in tax reform and what’s been done already. The website also allows the public to leave their opinions and suggestions on tax reform. Along with the website, there is a Twitter feed you can follow @simplertaxes.(Tweets show up as "Max & Dave.")

I don’t know how much this project will help get tax reform. I’ve always been a little skeptical of the ability of our current political leaders to work together on something as complex as tax reform. Let’s face it; everyone will have to give up something to fix the system. Currently, few politicians remember what the word compromise means and too many taxpayers see only what is best for them. And don’t get me started on the lobbyists.

I’ll add my opinion to taxreform.gov, I’ve already followed @simplertaxes, and I hope that some true reform comes from this initiative. But I’m not too optimistic for reform anytime soon.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

You Need the Numbers Before You Do the Return

Dear Rep. Bill Foster (D-IL) do you know what a CP2000 is? May I respectfully suggest that you check this notice out and then go back to the bill you just submitted to Congress and make some revisions or trash the bill completely?

A CP2000 is a notice the IRS sends to taxpayers concerning differences between the information records the IRS has received and what the taxpayer has reported on their tax return. For example, Joe wins a jackpot at a local casino in January of 2013 and is given the W-2G for the win at that time. But by the time Joe does his 2013 return in 2014, he’s forgotten all about it and doesn’t include the winnings on his tax return. About a year later, Joe will get a CP2000 from the IRS pointing out that he left this income off his return and please send them some more money.

Why should Rep. Foster check out this notice and the time it takes for it to be issued? Because he and co-sponsors Rep Mike Quigley (D-IL) and Jared Huffman (D-CA)  have introduced a tax reform bill; the Autofill Act of 2013 (H.R. 1532). The idea is that taxpayers will download from a secure IRS website a tax form with the income information already filled in for them. The income reported on W-2s, W-2Gs and 1099s. The taxpayer can accept the return as is, modify the information or do a return from scratch. It’s the Representative’s solution to the complex tax code and the cost of compliance.

Autofill is one of those ideas that sounds good but will be a bear to implement. Part of the problem with this particular bill is the time frame that the sponsors outline for implementation. Basically they want it to start with the 2013 returns that will be filed in 2014. That is a short time to make those kinds of changes to the tax system. And it doesn’t give anyone much time to get the word out to the public about the program and their right to make changes to the Autofill return. Most troubling to me is the section that requires the IRS to have the downloadable forms ready to go by February 15^th.  That is at least 13 days earlier than W-2, 1098, and 1099 forms have to be filed with Social Security and the IRS. In fact, if the information returns are filed electronically, employers and payers actually have until March 31^st. Then Social Security and the IRS need time to process the information. That’s why it takes so long to get CP2000 notices out. They can’t go out until the information is there. Under this bill, the downloadable returns could be incomplete or change as the issuers make corrections. Autofill won’t help if the correct numbers aren’t there.

As for Autofill reducing the costs of tax preparation, it might cost me clients with simple returns. But I can see more amended returns and compliance work due to information filed late or taxpayers wanting to make changes to the filled in return they filed.

Some kind of pre-filled out Federal return might be an option to help taxpayers. However, there are lots of issues which would have to be worked through before it could go live. The biggest issue would be filing deadlines for the information returns the IRS would need. It might mean that April 15^th would have to become June 15^th to give time for the info to be available and returns filed. The Autofill Act of 2013 needs to go back to the drawing board and take a serious look at how the current system works and what changes will have to be made to get an Autofill return program to be a benefit for taxpayers.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Debt Reporting

Currently, if you owe the IRS money, it generally doesn’t show up on your credit report. The exception is when a tax lien is filed on the debt. Since a lien is a public filing, the credit bureaus can easily find them. The IRS is not allowed to release other tax debts because of federal privacy laws. This could be changing.

The Government Accounting Office (GAO) has sent a report to Max Baucus the chair of the Senate Finance Committee and Charles Grassley a ranking member of the Senate Judiciary Committee suggesting that the law be changed to allow tax debt reporting. For 2011, individuals owed $258 billion and businesses $115 billion in tax debt. The GAO is suggesting the change to help collect the debt. The idea being a taxpayer would be more likely to pay off the debt if it will improve their credit rating and make it easier to obtain credit. It would also give potential lenders a better picture of the taxpayer’s financial situation.

There are a lot of issues to be worked out should Congress want to change the privacy law.

• Which debts and will there be a minimum balance due before it’s reported?
• How can the accuracy of the information the credit agency has be maintained?
• Will reporting debts actually increase collections?

Because of the impact a credit report can have on credit, housing and even employment, Congress needs to move carefully. The National Taxpayer Advocate’s Office has expressed concerns that it might cause taxpayers not to file if they know they will owe the IRS and it will show up on their credit rating. My concern is the accuracy of the reported tax debt. It can take the IRS a while to update their files when a taxpayer pays off a debt. Then there is time to notify the credit bureau and for them the make the internal changes. That could take some time to resolve. Time where the taxpayer will be affected by a debt long paid.

Right now, this is just a proposal but it’s something to keep an eye on in the future.

Accounting Today

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Location, Location, Location

Gov. Romney has proposed a limit on itemized deductions of $17,000. Of course, there were few details so we have a lot of questions; what will happen to the standard deduction, is the $17,000 for all filing statuses, will some deductions be treated separately…? There is also no doubt that the cut will hurt higher income taxpayers hardest. Imagine what Gov. Romney’s 2011 tax would have been if he could have only taken $17,000 instead of the millions in itemized deductions he was able to deduct.

Limiting tax deductions and credits based on income is nothing new. Income on the return has an impact on Earned Income Credit, IRA deductibility, child care credit and many other tax saving programs. In fact, until recently, itemized deductions could be limited by income. We accept it as part of the progressive nature of the tax code.

However, we’ve never limited credits and deductions based on where a taxpayer lives. That’s what an arbitrary cap like the $17,000 could do.

The most universal itemized deductions are not voluntary. They are the cost of living in an area. I’m focusing in on state and local income/sales taxes, property taxes and mortgage interest because they are tied to location and are in many ways out of the taxpayer’s control. A few years ago, several colleagues were discussing their property tax on a forum and I was surprised on the difference in their taxes for the same property value. And how many taxpayers have moved and found that to get the same house they had in their old location they would have to pay much more and take a larger mortgage. The IRS takes into consideration cost of living in different areas in per diem rates and the sales tax deduction charts. Location affects the cost of living.

Imagine, two taxpayers making $100,000 a year with itemized deductions including only state/local income or sales tax, mortgage interest and property taxes. One could find she can’t use all the itemized deductions under Romney’s plan because she paid over $17,000 in taxes and mortgage interest. While a friend, who lives in another location and earns the same amount, can use all his deductions because his cost of living is lower. To me, that’s plain wrong. They both should be able to deduct what they actually paid or both equally phased out based on their income level.

A cap or phase-out based on income has long been part of our tax code. But an arbitrary cap which will punish equal income taxpayers isn’t good tax reform.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Chicken or Egg Tax Cut

This weekend I heard someone go on and on about how cutting the income tax on business income in Kansas was so wonderful and how much money the person was going to save. If you haven’t hear, Kansas will no longer tax the income from a business, either a corporation, pass through income from a S-Corp or partnership or even a sole-proprietorship. Business income as the Kansas legislature has defined it included rental income.

The rationale behind these cuts is that business owners will use the money they are saving to hire more people and make up for the loss in revenue with taxes on the new wages. Let’s look at that for a minute. Joe is a sole proprietor and his tax on his 2011 business income in Kansas was $3000. As a good citizen, Joe spends that money on a new hire. The problem is that his $3000 will only pay for 400 hours at $7.50 an hour or ten weeks. (And that doesn’t include FICA matching and unemployment which would reduce the number of hours available.) If his new hire is taxed on all the $3000 he earned at the lowest tax rate, the tax will be $90. The state lost $3000 in tax and only received $90 as a replacement.

This whole process is based on a business owner using the tax savings to hire new employees. But what if they don’t need a new employee? They’re not going to hire one. I’ll admit that I will benefit from the new tax law but I don’t need another employee (or pay my part timer more or for a few weeks longer). The tax money I save just goes into my pocket and not into wages as designed. For me to need more help, I need more clients. That means either a competitor quitting the business or more taxpayers (potential clients) come into the area. To get to the point that I need my receptionist full season, I would have to increase my clients by 20%. A competitor quitting might do that but I don’t see an increase in population that would generate that many new clients anytime soon.

It’s a chicken/egg issue. The Legislature assumes that a business owner will put the money they save in income taxes into hiring. But for most of us, hiring won’t come until our business improves. I’ve said before we shouldn’t be making tax decisions on assumption (hopes) on how businesses and individuals will behave. But the state did that with this new tax law and I hope this optimism doesn’t get Kansas into trouble.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Stoning Glass Houses - Again

This is a post I wrote last year. Based on Gov. Romney’s recent remarks, I thought it should be brought back.

Talk about tax reform is everywhere. "Taxes aren't fair!" and "need to go". And key to the arguments of the Tea Party, other reformers and pot stirrers everywhere is the Tax Policy Center's report that in 2011, about 47% of all taxpayers paid no Federal income tax. That has a lot of taxpayers mad because what they heard and has been repeated is that 47% didn't pay Federal income any tax. And in order to fuel the anti-tax fire and win elections, the anger has been shifted from the tax code to pointing fingers at classes and types of people. "He didn't pay any taxes!" That's not fair! Get a rope! "Those People" should be stoned!

Before you throw anything, I have a question. Do you really know who you are stoning?

Are you sure that you aren't in that 47%? Do you really know what tax you paid and not just what your refund or balance due was? Before you start hollering about the tax credits "those people" used to pay no tax, check your return. Did you take advantage of those credits too? How much would you be paying in tax without that credit? Are you living in a glass tax house?

So now you're sure that you really did pay some federal income tax, but before you pick up that stone to throw at those awful people who paid no taxes, I would suggest you check your target. You could be aiming at your children or grandchildren or parent. There is that nice young man who picks up your trash, or the teacher's aide in your son's classe, or your favorite greeter at Wal-Mart. It could also be your boss or the owner of a business. If you want to take out your tax frustrations on the 47%, it's only fair to include everyone who benefited not just the ones you don't like.

Look at the facts. That Tax Policy Center report covered Federal income tax only. That 47% still paid into Social Security and Medicare, paid sales taxes, local property taxes and in most cases paid state income taxes. And the report found taxpayers in every income level and filing status who didn't pay any Federal income tax. Most of those taxpayers simply took advantage of current tax laws and legally paid no tax.

We need Federal tax reform. What we don't need to do is target taxpayers who are taking advantage of deductions and credits we don't qualify for. Let's face it; if you could qualify you would be using those same credits and deductions. Put your frustration and anger to solving the tax code problem and not throwing stones.

FYI-The link to the Tax Policy Center includes a nice pie chart that breaks down the credits and deductions being used to reduce taxes for the 47%.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Healthcare Musing

Just a little Friday afternoon musing.

Now that the Supreme Court has ruled on the Affordable Care Act, the enforcement side of the law comes into play. Despite stories of the IRS hiring staff to administer the program, many people are wondering how the IRS can make sure that everyone has health insurance. The bottom line is that the ACA may be very hard to enforce.

Which led me to wonder if we tax pros will see health insurance coverage added to the RTRP requirements? Part of the program is a check to make sure that our Federal taxes are up to date. I’m sure that some smart guy or gal at the IRS has been thinking about adding the “health care tax” to the other taxes they check. Taking that a little further, will we be seeing healthcare coverage part of the tax compliance required for IRS programs like Offer in Compromise?

Like I said, just a little musing.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Worse Tax Bill

“Worse tax bill ever” is how one Kansas legislator described the tax reform bill signed by Gov. Brownback on Tuesday May 22, 2012. While not exactly all that he proposed in his State of the State address, the new law will cut taxes $3.7 billion dollars in 5 years. In true Kansas fashion, getting the bill to the Governor was not without controversy. Both the Kansas House and Senate passed their version of the bill which went to a conference committee. But then, both chambers raced to pass the other chamber’s version of the bill. The House won, passing the Senate version and sending the bill to the Governor to be signed.

The bill reduces Kansas individual income tax rates, increases some standard deductions and cuts many tax credits. Tax rates have been reduced from 3.5%, 6.25% and 6.45% to 3% and 4.9%. The standard deductions for Married Filing Joint and Head of Household have increased to $9000. But, from my reading, it looks like the single deduction stays the same. Gone are the adoption credit, child care credit and food sales tax refund. And the Homestead Refund is now limited to property owners. It looks like the Kansas Earned Income Credit is still alive (at least I found no mention in the bill or articles about the bill.) These changes will take effect January 1, 2013.

There are major changes to corporate returns too. The bill’s supporters argue that the tax reductions will create an additional 20,000 jobs annually (over regular job growth) in Kansas and draw new businesses to the state. One of most questionable changes is that exempts 191,000 businesses from income taxes by ending taxes on their profits. Starting in 2013, I won’t be paying any KS income taxes since almost all my income is from business profits (a sole proprietor) and what other income I have will be reduced by my standard deduction and exemption to $0.00.

This is a Tea Party bill. Their supporters have pushed the bill over the objections of moderate Republicans, Democrats and social activists. It’s a bill that increases the tax burden on lower and working class taxpayers while helping higher income taxpayers. Too much of the bill depends on the creation of jobs and new businesses that will bring in new income. If that doesn’t happen, projections indicate a $2.7 million dollar budget shortfall by 2017. Not good!

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Mobile Worker's Income

The House has passed the Mobile Workforce State Income Tax Simplification Act of 2012. I discussed the bill last year here.

This bill doesn't apply to a taxpayer who takes a job in a non-resident state. It would only apply when an employer sends an employee to a non-resident state to work and the job lasts less than 30 days. It will be interesting to see what the Senate does and if it's passed the number of taxpayers who will hear part of the law and think it applies to them.

Learned Something New.

Until reading Prof. James Maule's blog this morning, I had never heard of a "tax zapper". It's a device that allows a business owner to keep a double set of books; one for themselves and the other for the tax man.

Check out - Tax the Tax Zappers at Mauled Again.