Tax Season is Upon Us

While we empathize with tax payers, which isn't that difficult since we are tax payers ourselves, our firm is very excited to be entering the busiest time of the year for our practice.

We love having people come to our office. First of all, the business is nice but secondly and nearly as important is the sense of pride we feel when we see familiar faces who continue to allow us to prepare their returns for them and those that are giving us the opportunity for the first time.

Please return to this spot often as through out the year we will be updating you on the latest and most pressing tax issues in a manner that is hopefully clear to the lay tax person. Questions are definitely welcomed. If we don't have the immediate answer we will find out for you.

Tax Repatriation Isn't As Simple As It Seems

There are a few different arguments on how the government should handle corporations bringing foreign income into the United States.

Some believe that a holiday should be put into effect into encourage investment, which will in turn fuel employment.

Another argument I've recently read suggests that by lowering the tax rate on repatriated income would actually encourage companies to send jobs offshore.

This blog post in Forbes explains the problem with a tax holiday on foreign income. Companies that employ cheaper overseas workers can bring their profits into the country at a reduced rate, while those that maintain their operations here in the states have to continue to pay the full 35% rate on their profits. Plus, whatever tax was paid in foreign taxes can be used to offset domestic taxes with the foreign tax credit.

This situation creates huge incentives to sending more jobs overseas as wages are lower and it will actually save companies tax wise to do so.

It seems that in order for a tax repatriation holiday to really make sense, it would have to spur enough domestic investment to offset the built in tax incentives.

Pensions Are A Major Problem Facing Governments At All Levels

According to an article from Reuters, the state of New York will need to raise over $1300 per resident for the next 30 years to fully fund their pension systems. In New Jersey it's $2475! But this issue is one that is facing nearly every state and local government in the country.

The recent economic downturn has cut severely into tax revenues, and with these governments having created budgets with expectations of continued economic expansion, they find themselves overstretched and unable to meet their obligations without severely cutting services.

It seems as if there are major confrontations developing across the country, with unions and their backers on one side, and those who feel that state employees have been coddled and want to cut taxes and spending on the other. I think the fight that's been taking place in Wisconsin is only the first of many such battles we will be seeing in the near future.

Regardless of how it all turns out, it is very apparent that pensions and other benefits are very big expenditures for governments at every level to account for and one which a solution seems difficult to come by.

California Wants to Remain the Film Capitol of the World

The California state assembly recently passed a bill that extends credits for movie makers. The extension is for another 5 years past 2014, so it's tentatively set to expire in 2019.

With the job market in the Golden State in horrible shape this seems like a good move. It was probably equally important to those in Sacramento to maintain California, and especially Los Angeles, as the movie center of the universe. But with the amount of movies and television shows being shot and produced outside of the state at far lower costs, this seems like it might only temporarily stem the tide.

5 Questions for Robert W. Wood

This is the first interview we've conducted here at Financial Focus. Our first interviewee is Robert W. Wood, a tax attorney from the San Francisco firm of Wood & Porter. He maintains a blog on Forbes called The Tax Lawyer, through which he discusses some of the more pressing tax matters of the day. What I really like about the blog is his abilities to identify the more interesting and important issues and also to be able to explain them in an easy to understand manner.

1. What do you feel are the most important tax laws that people should

be aware of for 2011?

That's hard to answer since so many are important. But here are a few. From a general planning viewpoint, I would include the alternative minimum tax, since it catches so many people unaware. I would also include estate and gift taxes, since 2011 and 2012 may be years of real opportunity, depending on what happens in 2013!

I would also ensure that business taxpayers think about the increasing importance of enhanced expensing allowances. There are truly amazing benefits in the short term. Finally, I would worry over the compliance issues associated with foreign income and foreign accounts. Despite all the recent press, I find that many taxpayers, especially those with their feet in multiple countries, are ignorant of these rules. The stakes have gotten very high both for income tax returns and for the related financial disclosures on FBAR forms.

2. What do you think the biggest issues in tax law are going forward

that people should keep an eye on?

There will continue to be pressure to raise rates at least for some taxpayers. That may impact traditional tax planning when it comes to accelerating deductions and deferring income. If rates go up, the incentives can be reversed.

Another huge area of interest to business people relates to independent contractor v. employee issues. The IRS is making a major push in this area. Moreover, it is possible that there will be major changes in the law on this issue. President Obama has previously indicated interest in the "loophole" presented by employers inappropriately characterizing workers as independent contractors and thus avoiding payroll taxes. Expect more scrutiny in this area, and more difficulty in resolving these disputes with the IRS going forward.

3. Do you feel as if the Bush Tax Cuts are on their way to becoming more

or less permanent?

I imagine there will be quite an impetus to change them. The wild card will be with the upper income levels and with capital gain rates. I was very surprised by the year-end compromise in 2010 to extend the rates for everyone through 2012. A 15% capital gain rate is extremely low. I don't think we've ever had a lower one. It would not surprise me to have it go back to 20% or so.

4. We're hearing murmurs once again about 'reforming' the tax code. What

do you think the odds are of that actually happening this time?

In part, it depends on what you mean by "reforming." Over the last 30 years that I've been practicing tax law, there have been numerous major tax laws passed. Some of them were in the nature of quite significant tax reform. Examples include the 1981 and 1986 tax laws, both of which brought sweeping changes. Many of the reform discussions going on presently involve what seem to be more rifle shots than shotgun approaches that will fundamentally alter the tax landscape.

5. If you could choose one thing to change in the tax code, what would

it be and why?

Well, this may be a strange one to point out. A peccadillo of mine concerns the exclusion from income for damages paid on account of personal physical injuries or physical sickness. I see many lawsuits resolve, and many plaintiffs who think that all or a part of their settlements should be tax-free. In 1996 Congress changed section 104 to require that personal injuries must be "physical" to be excludable from income. There's been huge controversy about what this "physical" requirement means, but much remains unclear. The Tax Court docket is frequently clogged with cases concerning this provision, and many taxpayers are caught within these imprecise rules. Often a psychological injury may produce physical problems or illness, and in my view, recoveries for such injuries should not be taxed.

A Preposterous Proposal

This is one of the most ridiculous ideas I’ve ever heard of. Some lawmakers are proposing that taxpayers pay more of their fair share of road construction costs by taxing them on the amount of mileage they’ve driven. The idea came about in response to lower tax revenues due to higher fuel efficiency in newer cars. The way it would work is that there would be a GPS device in stalled in your automobile that would track the amount of mileage driven and that info would be transmitted back to the government.

I think I’ve done a good job above of making it sound as if it isn’t that far out an idea. But this is an incredibly convoluted and overly complicated ‘solution’ to a very simple problem. Sure, it makes sense on the face of it to tax people based on their usage. That part makes sense, although it is a bit of a regressive tax idea. But to actually try and track something like driving distance using a government owned GPS system is nutty. First of all, there’s the obvious privacy issues. Some people don’t think it’s the government’s right to know what they’re doing and where, at all times. Secondly, there’s the cost and hassle of having everyone install these devices, which will surely be a headache. Thirdly, this is going to set a bad precedent as far as the government taxing us on activities they categorize as falling a 'user tax' situation. The possibilities are endless.

There are tons of gaping loopholes in the current tax code that, if closed, would provide huge windfalls for the government and wouldn’t require anything but a vote and a signature. I always feel that if an idea seems too complicated for it’s own good, it probably is, and this one falls in that category.

Notes from the IRS Liaison Meeting

Dave Flemmer himself and I were participants in an IRS liaison meeting this morning. What was supposed to go from 9 until 11:30 ended up spilling over to about 12:30. Yes, it was long. Yes, it was arduous. And yes, it was informative.

I’m going to highlight some of the things I learned at the meeting. First of all, IRS employees have an uncanny ability to internalize the objectives of their respective departments to a degree that is a little unsettling. Now don’t get me wrong, everyone in the meeting was as nice as could be, it’s just that they seem to lack an ability to think outside of their immediate job duties, which is strange considering I’m sure nobody grew up thinking they want to be a collections agent for the IRS so they can help get the IRS the money they’re owed. They said a number of times that we as tax practitioners were the first line of defense in their crusade to eliminate tax fraud and to get those that owe to pay up. I guess working for the IRS, you are desperate for professional allies and the hope is that we’ll want to be a part of their mission since we are after all brothers in the tax business.

This over identification with their departments was in evidence when they went around the room and had each of them explain a ‘little’ about the work they do. The acronyms were flying and there was more than a little shop talk that we as outsiders were not at all familiar with.

But within the jargon was a lot of useful information.

Unenrolled Agents – Unenrolled agents, or uncertified tax preparers, will have to be fingerprinted before they will receive their PTIN’s. They will also have to maintain 16 hours of CPE a year

EFTPS – Every business has to make payments of more than $2,500 using the EFTPS system, the IRS online payment program. The IRS will no longer accept paper coupons or checks. There are ways around using the system but they make little sense.

Taxpayer vs. Tax Preparer Accuracy Statistics – We learned in the meeting that 5% of taxpayer prepared returns had errors while tax preparer returns had an error rate of 1%. But that was on paper returns. For electronic returns the numbers for each were both under 1%. Now, these are math errors and not reflective of whether the returns reflected over or under estimates of income or deductions and credits.

Examinations – Essentially what was stressed was that you and your clients should show up to the examination meeting prepared and having brought exactly what was requested. It will put you on a better standing with the IRS and will help allay the agents’ suspicion. Basically, stay on their good side and they’ll be more understanding.

Issue Management Resolution System – This is a program that has been put together to help address issues within the IRS, both discovered internally and from without the organization, that is going to make it easier to correct problems. It’s essentially bureau wide clearinghouse so that problems can be handled once instead of each time they show up individually.

Well, this is the gist of what I got from the meeting. My hand became very tired and I wasn’t able to get everything. Nor was my mind capable of taking in everything that was said, but I hope that this info is of some use to you.