Lois Lerner Skates

No surprise here – Obama’s Justice Department declared, just the other day, that IRS (in the person of the now famous Lois Lerner) really did nothing nefarious in its myriad investigations and scrutiny of various nonprofit “Tea Party” groups relative to their tax exemption applications.  Obama’s boys have decided that there will be no charges filed against Lerner, or anybody else amongst the Revenooers.

According to Assistant Attorney General Peter Kadzik, Justice has found “substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints.  But poor management is not a crime……We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution.  We also found no evidence that any official involved in the handling of tax-exempt applications or IRS leadership attempted to obstruct justice.  Based on the evidence developed in this investigation and the recommendation of experienced career prosecutors and supervising attorneys at the department, we are closing our investigation and will not seek any criminal charges.”

So there.

The conclusion obviously leaves Darrell Issa (R-California) cold after his House Oversight Committee spent a few years chasing all of this down.

“The Justice Department’s decision to close the IRS targeting investigation without a single charge or prosecution is a low point of accountability in an administration that is better known for punishing whistleblowers than the abuse and misconduct they expose.”

And more IRS news came down last week – good news, the Revenooers say, for we and thee:  new “protections” being put in place for next filing season, relative to preservation of taxpayers’ identity.

Quoth Commish Koskinen, “Joining me today are representatives from the electronic tax industry, the software industry and the states.  These members of our Security Summit group have collaborated with the IRS on this effort from day one.  We began mapping out a strategy in March, and together we have made significant progress in just a few months……I’m delighted to report that, for next year’s tax filing season, we are on track to fulfill our goal of having new safeguards in place for taxpayers when they file their returns……Most of these new protections will be invisible to taxpayers, but behind the scenes we are putting in place a multi-layered, multi-faceted approach……We’re going on offense like never before.”

Ahhhhhhhhhh, we feel so much better now, secure in the knowledge that IRS is truly on top of things.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments, and can be reached at jquinn@ashleyquinncpas.com.

Good News/Bad News From Low Inflation Rate

If there’s anything good that may have come from Obama’s actions (or inactions, as the case may be) lately it’s the fact that inflation is little or none in the last year or so.

The bad news, of course, is that Social Security recipients can expect zero in the way of a raise, next year, because any annual cost of living increases arise when the consumer price index moves upward.  The good news, however, is that worker bees will experience no increase in the amount of their annual earnings which will be subject to Social Security and Medicare taxes.  Thus, for 2016 the combined FICA and Medicare tax rate will remain at 15.3%, paid half each by the worker and his employer.  Likewise, there will be no change in the tax rates or earnings base applicable to self-employed folk.

And speaking of FICA, an aspect of this annoying levy has long irked folks whose employment arrangements include their earning of certain forms of “deferred compensation.”  And a recent decision of the Court of Appeals for the Federal Circuit (in the case of Mr. Balestra) brings this annoying law front and center.

Seems Mr. Balestra was an employee of United Airlines (UAL) until his retirement in 2004.  He had earned some “nonqualified deferred compensation” which had not been paid as of his retirement date, upon which date the full present value of his deferred comp was included in the FICA tax base, resulting in FICA withholding on income which he didn’t receive as of that point in time!  And unfortunately, UAL had entered bankruptcy in 2002, two years before our boy’s retirement date.  Consequently, of course, UAL’s obligation to pay Balestra’s deferred comp was ultimately discharged, with the majority of the benefits never having actually been paid to Balestra.  In 2010, UAL made the final payments to creditors as required under its bankruptcy plan, leaving Balestra essentially out in the cold – no deferred comp, despite FICA having been paid by him!

O tempora, O mores!

Balestra went to Court, seeking a refund of the FICA withheld, but the Revenooers and the Courts told him to take a hike.

Nice.

And finally, this week, we recently learned via The Wall Street Journal that the Tax Foundation’s annual International Tax Competitiveness Index finds that, once again, the U.S. of A. ranks a dismal 32nd out of 34 industrialized nations.

The index measures various factors that determine how “friendly” a government is to business and investment, including the amount of taxation and the complexity of tax rules.  While Uncle Sam gets credit for not imposing any sort of “value added tax” over and above all of the other taxes, the U.S. comes in “dead last” among the 34 developed countries in the Organization for Economic Cooperation and Development (OECD) when it comes to taxing corporate income!  The U.S. top marginal corporate rate of 39% is a whopping 14 points above the OECD average of 25%!

Don’t laugh, but Estonia again cops the top ranking in this year’s index – with a flat 20% rate on both personal and corporate income – and zero tax on personal dividend income!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, with offices in Incline Village and Reno.  He can be reached at jquinn@ashleyquinncpas.com.

Some Recent Development Which May Affect You

So, we’re into the last quarter of the tax year – no time like the present to start your tax planning, and enhance your awareness of some recent changes in the rules.  A few items of importance, starting with some provisions of the recently enacted “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (the Transportation Act):

  • Partnerships and S corporations must file their 2016 returns by the 15th day of the third month after the end of the tax year – this means March 15 for calendar year entities.  This is a change for partnerships, which previously had until the fourth month after year end by which to file.  C corporations will have to file by the 15th day of the fourth month after year end – previously the deadline for these entities was the third month after year end.
  • Effective for returns required to be made and statements required to be furnished after December 31, 2016, lenders must report more info on mortgages, including the origination date, the amount of outstanding principal, and the address of the underlying property.  (More info for use by the Revenooers in potential audits of issues associated with your mortgage loan!)
  • IRS will now have six years (instead of just three) within which to audit your return in situations where overstatement of your tax basis (and not just omission of gross income) results in a substantial understatement (2 5% or more) of your taxable income.  (The Revenooers had long thought these facts always allowed them the three additional years for audit, but they consistently lost the issue in the courts – including cases before the Supremes – so they now have been successful in their efforts to have the law actually changed to reflect the answer they want.)

Another important recent change, courtesy of the Ninth Circuit Court of Appeals, results in a doubling of the home mortgage interest deduction for unmarried taxpayers, as we recently mentioned.  The limitations on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage “acquisition debt” and $100,000 of home equity debt) are to be applied on a “per individual” basis, and not on a “per residence” basis as IRS had always thought.  Consequently, for unmarried co-owners of a residence, the combined limit for the mortgage interest deduction is doubled from a maximum of $1.1 million to a maximum of $2.2 million!  Pretty nice windfall!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

Busy September Tax Court

The Tax Court was quite busy in September – particularly in hammering taxpayers with a “nice try, but no cigar” conclusion to their cases.  Three in particular:

  • In Ronald C. Fish v. Commissioner, the taxpayer tried one which has been pled to us on many occasions by beleaguered taxpayers:  deduction on the 1040 of losses passed through from partnership investments owned by his IRA.  The taxpayer in this case argued that (in his view) an IRA has “all the attributes of a grantor trust and is therefore a pass through entity which makes all items of income, deduction and credit treated as belonging…(to him) and reportable on …(his) individual tax return.”  Of course, IRS and the Tax Court did not agree, because clearly transactions occurring within the IRA do not result in taxable events which are reported on the holder’s individual income tax return.  The law is quite clear that only distributions from and payments out of an IRA trigger income tax consequences for the payee or distribute.  And if you think about it, the taxpayer eventually will get the benefit of the losses – in the form of less dough available within the IRA to distribute to him as retirement income.  It’s just that simple.
  • And then we have Donald L. Dunnigan v. Commissioner which was another “nice try” on the taxpayer’s part, but to no avail.  Seems that Dunnigan obtained a business line of credit to help support his sole proprietorship appraisal business, and he drew $50,000 down on the line over time.  In 2009, he was unable to repay the borrowed funds in full, negotiating with the lender to settle the obligation for about $15 grand.  The lender ultimately issued a Form 1099-C at year end, reporting the $35 grand as cancellation of indebtedness income, of course, but erroneously checked the box on the form indicating that the taxpayer was not “personally liable” for the debt repayment.  So, in preparing his income tax return for the year, Dunnigan improperly relied on the incorrect 1099-C, in addition to concluding that he was exonerated from reporting the income on some theory of “hardship” (due to a medical condition).  Unfortunately, neither claim succeeded, in that the incorrect 1099-C was irrelevant, given the actual legal agreement which the taxpayer had signed in the first place, and further, the law does not provide any form of “hardship” exception for health reasons relative to this kind of tax event.
  • Finally, in Charles Okonkwo, et ux. v. Commissioner, IRS slapped the taxpayers for trying to deduct a rental loss associated with a house rented to their daughter for less than a “fair market value” rental rate.  The Internal Revenue Code is crystal clear in stating that a dwelling unit is used as a residence of the taxpayers (and thus, by definition, a personal use property and not a rental property) if the taxpayers or a family member uses it for personal purposes for more than a defined period of time and/or does not pay fair market value rent.  Thus, daughter’s use of the residence in question was personal and is attributed to the taxpayers themselves.  Result:  no allowable rental loss!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.  Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.