Larry's Tax Law

As reported in my January 20, 2015 blog post, the IRS continues to take strong blows to its body in terms of budget setbacks.  President Obama, however, as part of his administration’s 2016 budget proposal issued on February 2, 2015, plans to end some of the pain being imposed on the Service.  His budget proposal, if enacted, would infuse over $12.9 billion into the Service’s coffers during fiscal year 2016.  This represents an increase of approximately $2 billion over the fiscal year 2015 IRS budget.

President Obama’s 2016 budget proposal includes provisions which, in the aggregate, increase income tax revenues by approximately $650 billion over 10 years.  At least three of the proposed tax increases will be of concern to a broad spectrum of taxpayers:

On February 2, 2015, President Obama published his 2016 budget proposal.  It proclaims that “[a] simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals.”  While some tax practitioners may debate the claim that the tax provisions embedded in the President’s budget proposal make the tax system simpler, it is a certainty that a significant number of tax practitioners will question the fairness of these provisions.

Charitable Deductions

As in the past, the President’s budget proposes that “wealthy millionaires” pay no less than 30% of their income in federal income taxes.  To facilitate accomplishing that goal, President Obama suggests these taxpayers be prevented from making charitable contributions to reduce their tax liability.  He states:  “…this proposal will act as a backstop to prevent high-income households from using tax preferences to reduce their total tax bills to less than what many middle class families pay.”

As reported in my January 21, 2014 blog post, federal budget cuts continue to hit the IRS hard.  In the Consolidated Appropriations Act of 2014, our lawmakers cut the Service’s budget by more than $500 million.  The Continuing Appropriations Resolution, 2015, signed by President Obama on September 19, 2014, gave the Service about a $350 million budget setback.

While it is hard to debate the need for government budget cuts these days, deciding where to make the cuts is surely a difficult endeavor.  Nevertheless, perplexing as it may be, lawmakers find it necessary and appropriate to cut the funding of the IRS, a division of our government that collects revenue.  Making these budget decisions even more baffling, we currently have an annual tax gap in this country of over $450 billion.  Adequately funding the IRS so that it can enforce our tax laws, thereby reducing the annual tax gap, should be a given.  Apparently, it is not a given to our lawmakers.

Of interesting note, the annual tax gap has increased by approximately $150 billion since 2001.  Yet, the IRS has had its budget slashed by over $1 billion in the last five (5) years.

The Extender’s Bill impacts Subchapter S in at least two respects.  It amends IRC Section 1374(d)(7) and IRC Section 1367(a)(2).  Both of these amendments are temporary.  Unless extended, they only live until the end of this year.  Yes, they only apply to tax years beginning in 2014.

I.  IRC Section 1374(d)(7).

In the last five (5) years, we have seen at least three temporary amendments to the built in gains tax recognition period.

While it is highly unlikely Santa’s little helpers will deliver to taxpayers a tax reform package by the end of 2014 that is acceptable to the Senate, the House of Representatives and the President, House Ways and Means Committee Chairman, Dave Camp, made one last attempt to move the ball forward.  On December 11, 2014, shortly before Chairman Camp’s expected retirement, he formally introduced a bill in the House to adopt into law the Tax Reform Act of 2014 which he authored and circulated in proposed form to lawmakers back in February.  Affixed with the label “Fixing Our Broken Tax Code So That It Works For American Families and Job Creators,” the proposal is now formally before Congress.

Dear Readers:

I'm proud to announce that Larry’s Tax Law was featured in LexBlog’s Top 10 Law Blogs List in February, March and July of this year.  I hope to keep publishing useful material for CPAs and Tax Professionals.

Your feedback and guidance are truly appreciated.  Please let me know if there are any topics or issues that you would like me to address in future blog posts.

Thank you for your support this year!  Best wishes for a wonderful holiday season and a terrific 2015.

Best,

Larry

I was recently interviewed by Ama Sarfo, a reporter for Law360 (a national legal publication of LexisNexis).  I discussed some of the audit risks Subchapter S corporations and their shareholders face these days.  Below is an excerpt of the Article.

Audit Risk:  It's estimated that the U.S. has a $450 billion gap between taxes that are owed to the government and taxes that are actually paid on time.  This staggering number, despite significant budgetary constraints, has put taxpayer compliance back in the forefront for the IRS. In the 1990s, the Service was forced to move its focus from the audit function to information and technology as its systems were terribly out of date.  Taxpayers need to be on their game because the IRS is back in the audit business, and noncompliance penalties are stronger than they've ever been before.

Whether we will see tax reform in this country anytime soon is debatable.  When and if we see it, whether IRC § 1031 will survive has been a subject of discussion.

House Ways and Means Committee Chairman David Camp issued a discussion draft of the Tax Reform Act of 2014 earlier this year.  The proposed legislation spans almost 1,000 pages.*  One of its provisions repeals IRC § 1031 and taxpayers’ ability to participate in tax-deferred exchanges.  The Obama Administration responded to Chairman Camp’s proposal.  It wants to retain IRC § 1031, but limit its application to $1,000,000 of tax deferral per taxpayer in any tax year.  Based upon the precise wording of the White House’s response to Chairman Camp’s proposal, it appears the $1,000,000 limitation would only apply to real property exchanges.  So, personal property exchanges would be spared from the proposed limitation.  Of course, there is always the possibility that lawmakers, if they take this approach, would expand the White House’s proposed limitation to apply to personal property exchanges.  Only time will tell.

Thomas v. Commissioner, TC Memo 2013-60 (February 26, 2013)

The saga of Michael and Julie Thomas started in the early part of this decade.  Michael was the head of real estate acquisition for DBSI in Idaho.  There, he met fellow DBSI employee Don Steeves, who was a CPA with seven (7) years of experience, primarily working in the real estate investment industry.  When Michael started two real estate businesses, TIC Capital ("TIC") and TICC Property Management ("TICC"), he hired Steeves as an independent contractor to serve as CFO of TIC and as the managing partner of TICC.  His compensation was incentive based—he received compensation which was based on the financial success of the two businesses.  In good years, Steeves’ compensation was off the charts.  In addition to acting as CFO for the two businesses, Steeves prepared Michael’s and Julie’s income tax returns.  They relied upon him to oversee all aspects of accounting and tax compliance for both of the businesses and their personal affairs.  They let him take total control of these functions.