Supreme Court: Maryland has been wrongly double-taxing residents who pay income tax to other states

Originally Published in The Washington Post

A divided Supreme Court ruled Monday that Maryland’s income tax law is unconstitutional because it does not provide a full tax credit to residents for income tax paid outside the state, a ruling likely to cost Maryland counties and localities across the country millions of dollars in revenue.

The court voted 5 to 4 to affirm a 2013 Maryland Court of Appeals ruling that the state’s practice of withholding a credit on the county segment of the state income tax wrongly exposes some residents with out-of-state income to double taxation. Justices said the provision violated the Constitution’s commerce clause because it might discourage individuals from doing business across state lines.

In most states, income from elsewhere is taxed both where the money is made and where tax­payers live. To guard against double taxation, states usually give residents a full credit for income taxes paid on out-of-state earnings.

Maryland residents are permitted to deduct income taxes paid to other states from what they pay in Maryland income tax. But the state did not allow the same deduction to be applied to a “piggyback” tax that is collected by the state for counties and the city of Baltimore.

The ruling affects about 55,000 Maryland taxpayers, according to the state comptroller’s office.

Those who tried to claim the credit on their county income tax returns between 2006 and 2014 are likely to be eligible for refunds, which officials estimate could total $200 million with interest.

Going forward, certain small-business owners who pay income taxes to another state on income earned in that state will be able to claim a credit for both the state and county portions of the Maryland tax, costing Maryland an estimated $42 million a year in revenue.

Montgomery County, which has the highest share of residents with out-of-state income, stands to be hardest hit. State officials estimate that the county is on the hook for about $115 million in refunds and interest, plus a loss of $24 million a year in tax revenue.

“I was hoping we would avoid this,” said County Executive Isiah Leggett (D), warning that the loss of revenue increases the likelihood of a major property tax increase next year. “This case cannot be overstated in terms of its significance.”

The ruling in Comptroller of the Treasury of Maryland v. Wynne also potentially affects thousands of other cities, counties and states with similar tax laws, including New York, Indiana, Pennsylvania and New York.

The case was brought by a Howard County couple, Brian and Karen Wynne, who reported $2.7 million in 2006 income, about half from their stake in Maxim Healthcare Services, a Columbia-based home-care and medical staffing company that does business in more than three dozen states.

The Wynnes paid $123,363 in Maryland state income tax and claimed an $84,550 Maryland credit for taxes paid in other states on income from Maxim.

Maryland taxes personal income at up to 5.75 percent. It also collects and distributes a piggyback income tax of up to 3.2 percent for each of the 23 counties and Baltimore City. But Maryland until now has offered no credit for the piggyback tax — in this case, the 3.2 percent the Wynnes owed to Howard County. The Wynnes and their attorneys contended that this represented about $25,000 in illegal double taxation.

The court was sharply divided, although not along the usual ideological lines. Justice Samuel A. Alito Jr. wrote the opinion for a majority that comprised him, Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Stephen G. Breyer and Sonia Soto­mayor.

Alito said the court has long recognized that the commerce clause has a “dormant” or underlying meaning. This holds that while the clause gives Congress the power to regulate commerce among the states, it also was intended to ensure that states would not pass laws to restrict interstate business.

Maryland’s tax law violates that implicit aspect of the commerce clause, Alito said.

State officials argued that under the due process clause of the Constitution, states have a historic right to tax the income of their residents, no matter where it is earned.

The piggyback segment is excluded from the tax credit, officials said, to ensure that all residents pay an equitable share for local government services such as schools and public safety.

But Alito said Maryland’s argument is flawed because states have long offered a similar credit for out-of-state taxes paid by corporations, who “also benefit heavily from state and local services.”

Alito called Maryland’s tax policy “inherently discriminatory,” saying it essentially operates as a tariff, or a tax designed to restrict trade.

Justices Ruth Bader Ginsburg, Antonin Scalia, Elena Kagan and Clarence Thomas dissented, with Ginsburg, Scalia and Thomas writing separate opinions.

Ginsburg, writing the principal dissent, said there was nothing in the Constitution that compelled Maryland — or any other state — to change its laws because of taxes paid by its residents elsewhere. .

In his dissent, Scalia called the dormant commerce clause “a judge-invented rule under which judges may set aside state laws that they think impose too much of a burden upon interstate commerce.” Scalia said he agreed that such a view of the clause has a long history. “So it does, like many weeds,” he wrote. “But age alone does not make up for brazen invention.”

Brian Wynne, who now lives in Carroll County and no longer works for Maxim, declined to comment Monday.

Michelle Parker, a spokeswoman for Comptroller Peter Franchot (D), said in a statement Monday that the office will “work diligently and in a timely manner to comply with the decision and enforce Maryland law consistent with the decision of the Supreme Court.” Parker added that the office is already reviewing about 8,000 refund claims dating back tjo 2006.

Money for the refunds will come from the state’s income tax reserve fund. The state will recoup that money by reducing state income tax revenue sent to localities each quarter over a period of two years, starting in June 2016.

Maryland’s General Assembly last year lowered the interest rate that applies to refunds from past years in order to cushion the blow in case the Supreme Court ruled against the state. The interest rate was reduced from 13 percent to the average prime rate during fiscal 2015, or about 3 percent.


Phishing Remains on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

Originally Published in IRS.GOV

WASHINGTON — The Internal Revenue Service today warned taxpayers to watch out for fake emails or websites looking to steal personal information. These “phishing” schemes continue to be on the annual IRS list of “Dirty Dozen” tax scams for the 2015 filing season.

“The IRS won’t send you an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS that takes you by surprise,” said IRS Commissioner John Koskinen. “I urge taxpayers to be wary of clicking on strange emails and websites. They may be scams to steal your personal information.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or find people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Stop and Think before Clicking

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.


‘State of the union is strong,’ Obama declares in address

Originally Published in LA Times

President Obama declared America ready to “turn the page” on years of hardship and economic insecurity in a State of the Union address Tuesday night that offered a sprawling, post-recession domestic agenda aimed at appealing to the middle class – and at revitalizing his presidency in its final two years.

“America, for all that we’ve endured; for all the grit and hard work required to come back; for all the tasks that lie ahead, know this: The shadow of crisis has passed, and the state of the union is strong,” Obama said.

It was the first time Obama used the familiar phrase so directly, without qualification or condition, in a State of the Union speech.

At times boastful, confident and even cocky, Obama appeared unfazed by his party’s electoral pounding in the midterm election less than three months ago or his year of slouching approval ratings. He offered few overtures to the opposition, even interrupting his rhetoric about bipartisan harmony to shoot back a zinger at Republicans.

When he noted he has “no more campaigns to run,” some Republicans cheered. Obama responded with his own dig.

“I know ’cause I won both of them,” he ad-libbed.

Obama declared 2014 a “breakthrough year for America,” a dramatic shift for a president who has spent his time in office either slogging through grim economic news or pleading for patience for better times ahead. But White House aides argued that the president was ready to move the economic debate past fights over austerity into what he labeled “middle-class economics.”

He outlined a wide-ranging platform to define the term. Obama proposed free community college, expanded child-care tax credits, a new tax benefit for two-income families, a push for paid family leave, and a proposed tax increase on the wealthy to pay for programs the White House says will help a battered middle class participate in the economic turnaround.

Obama vowed to improve job training programs, advocated “a free and open Internet” and issued a blunt challenge to lawmakers who oppose raising the minimum wage.

“If you truly believe you could work full time and support a family on less than $15,000 a year, go try it,” he said, with a smile. “If not, vote to give millions of the hardest-working people in America a raise.”

Obama’s remarks drew a contrast to his political opponents, who are aiming to turn the page from the Obama era to a new one of Republican dominance in Congress.

Delivering the party’s rebuttal, freshman Republican Sen. Joni Ernst of Iowa described Americans as still rattled from the aftershocks of the Great Recession. She squarely blamed the president’s policies, including his landmark healthcare law.

“We see our neighbors agonize over stagnant wages and lost jobs. We see the hurt caused by canceled healthcare plans and higher monthly insurance bills,” she said.

“Americans have been hurting, but when we demanded solutions, too often Washington responded with the same stale mind-set that led to failed policies like Obamacare. It’s a mind-set that gave us political talking points, not serious solutions.”

Ernst reiterated Republicans’ promise to “repeal and replace” Obamacare, known formally as the Affordable Care Act.

Obama looked out on a House chamber filled with the first entirely GOP-controlled Congress in nearly a decade and more Republican opponents than at any point in his time in office. Still, he saved his gestures toward compromise and bipartisan outreach for well into his speech — and did not offer any specific olive branch to new Senate Majority Leader Mitch McConnell of Kentucky, who could determine whether Obama chalks up any more major legislative victories before leaving office.

McConnell had little to applaud.

“The biggest problem is the president made a speech that made it look like he’s going to run for office again. His time for running is over. His time for governing is here. And in order to accomplish things over the last two years of the Obama administration, he needs to work with the Republican Congress,” McConnell said in a statement.

Obama made a broad appeal for “a better politics” and criticized partisan “gotcha moments” and “fake controversies,” but he seemed to do little else to ease the tensions.

His speech was not aimed at political centrism. Buoyed by his rising public approval and an improving economy, the president was eager to use the moment to show the public — and Washington — that he wouldn’t go quietly, aides said.

Obama pledged to veto any measures that would undo his sweeping immigration executive actions or his healthcare law. His tax proposals, which would raise $320 billion in new revenue over a decade, were more likely to frame the upcoming debate than start negotiations on tax reform.

After a year of being whipsawed by foreign crises, Obama defended his policies overseas against those who have pushed for more aggressive responses. He cast his choices as “a smarter kind of American leadership.” The phrase echoed a catchphrase the White House has used before to encapsulate his foreign policy: “Don’t do stupid stuff.”

“When we make rash decisions, reacting to the headlines instead of using our heads, when the first response to a challenge is to send in our military — then we risk getting drawn into unnecessary conflicts and neglect the broader strategy we need for a safer, more prosperous world,” Obama said in his address. “That’s what our enemies want us to do.”

He defended the ongoing multinational nuclear negotiations with Iran and restated his promise to veto proposed legislation that threatened additional sanctions against Tehran. He touted his plans to open up U.S. policy toward Cuba, urging Congress to end the half-century trade embargo as Alan Gross, the imprisoned American aid worker freed recently after five years in a Cuban prison, looked on from the balcony.

Some Republicans answered the White House’s symbolism with their own, inviting Cuban democracy activists as guests.

Even as Republicans in Congress refuse to allow the transfer of Guantanamo Bay detainees to prisons inside the U.S., Obama affirmed his belief that the United States should go beyond its dramatic reduction in the number of detainees at the U.S. military prison in Cuba and close it altogether, as he promised he would do shortly after he took office in 2009.

Obama cast the U.S.-led coalition battling Islamic State extremists in Iraq and Syria as strong and urged patience. He vowed to work with Congress to rewrite the law for use of force that has authorized the air campaign already underway.

Senior administration officials described updating that law as the president’s top legislative priority.

Another focus is likely to be passing a key trade deal, which would require Obama to persuade his own party to join the effort. To that end, he made a rare appeal aimed at the Democratic base.

“Look, I’m the first one to admit that past trade deals haven’t always lived up to the hype, and that’s why we’ve gone after countries that break the rules at our expense. But 95% of the world’s customers live outside our borders, and we can’t close ourselves off from those opportunities,” he said.

Obama offered measured remarks on two of the controversies that consumed part of the last year. First, he made a plea for criminal justice reform in the wake of the debate over race and policing that followed the unrest in Ferguson, Mo., and in New York City after white police officers killed unarmed black men, and grand juries declined to indict either officer.

People may have different “takes” on the events, “but surely we can understand a father who fears his son can’t walk home without being harassed,” he said. “Surely we can understand the wife who won’t rest until the police officer she married walks through the front door at the end of his shift.”

Similarly, on the debate over the balance between free speech and anti-Semitic and anti-Muslim messages that erupted after the terrorist attacks this month on the French magazine Charlie Hebdo, Obama appealed for understanding.

“As Americans, we respect human dignity, even when we’re threatened,” he said.

In the end, though, he returned to the heart of his message, an economic policy aimed at strengthening the middle class.

The country has recovered from hardship, he said, remaking itself like a family that suffers but works toward a better day.

“We’ve laid a new foundation,” he said. “A brighter future is ours to write.”


IRS Made Errors on 24% of EITC Payments

Originally Published in ACCOUNTINGTODAY.COM

Even though the Internal Revenue Service has reported an overall decline in the improper payment rate for the Earned Income Tax Credit since fiscal year 2003, the amount of payments made in error has increased from $10.5 billion in fiscal year 2003 to $14.5 billion in fiscal year 2013, according to a new government report.

The IRS’s fiscal year 2013 EITC improper payment report to the Treasury Inspector General for Tax Administration estimates that in fiscal year 2013, EITC claims totaled approximately $60 billion, while 24 percent of the EITC payments were paid in error, according to a report released Wednesday by TIGTA.

An earlier TIGTA report last month had reported on the IRS’s high error rate and improper payment amounts for the EITC, along with the Additional Child Tax Credit (see IRS Urged to Crack Down on Improper EITC and ACTC Payments). Using IRS data, TIGTA estimated that the potential ACTC improper payment rate for fiscal year 2013 was between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion.

The new report focused on the IRS’s compliance with Executive Order 13520, Reducing Improper Payments and Eliminating Waste in Federal Programs, which requires TIGTA to assess the IRS’s compliance with the order on an annual basis. Executive Order 13520 aimed to increase federal agencies’ accountability for reducing improper payments while continuing to ensure that their programs serve and provide access to their intended beneficiaries. In the new report, TIGTA acknowledged that the IRS has taken steps to ensure access and participation by eligible individuals. The IRS estimates that the participation rate for individuals who are eligible to receive the EITC was nearly 80 percent for tax year 2010.

However, TIGTA pointed out that the IRS is not in compliance with certain requirements of Executive Order 13520 for fiscal year 2013. For example, the IRS has not established annual improper payment reduction targets as required.

Nonetheless, the IRS is making some progress related to its inability to comply with this requirement, TIGTA acknowledged. For instance, the IRS has received approval from the Office of Management and Budget to establish and report supplemental measures in lieu of annual reduction targets.
While the IRS is currently not in compliance with the quarterly reporting requirement for high-dollar improper EITC payments (that is, payments totaling more than $5,000) for fiscal year 2013, according to TIGTA, new revisions to the quarterly reporting requirements make it unlikely that the IRS would be required to report any quarterly high-dollar payments for fiscal years 2014 and beyond.

TIGTA made no recommendations in the report. In response to the report, IRS CFO Robin Canady wrote, “The Earned Income Tax Credit (EITC) is the Treasury Department’s only high risk program and poses numerous challenges with respect to improper payments and reporting.”

Canady also reiterated some of the IRS’s objections to the report last month on the EITC and the ACTC: “As we reported in our response to your performance audit on the Additional Child Tax Credit (ACTC), the IRS disagrees with your assertion that our risk assessments do not accurately reflect the risk associated with the ACTC payments and TIGTA’s potential outcome measure estimates.”

A provision in a report attached to the $1.1 trillion spending bill passed by Congress last month aims to stem the tide of improper payments of refundable tax credits such as the EITC by requiring taxpayers who use consumer tax prep software to self-prepare their tax returns to undergo the same kinds of questions that professional tax preparers are required to answer for their clients’ returns (see Congress Requires Self-Preparers and Consumer Tax Software to Check for Improper Tax Credits).


IRS Commissioner Predicts Miserable 2015 Tax Filing Season

Originally Posted on Forbes

Internal Revenue Service Commissioner John Koskinen warned that close to half the people trying to reach the IRS by phone might not get through during the upcoming 2015 tax filing season. “Phone service could plummet to 53%,” he told an audience of tax practitioners at the AICPA National Tax Conference in Washington, D.C. today. That would be down from an already unacceptable 72% during the 2014 filing season. The average hold time projection: 34 minutes! What’s to blame? Budget woes. “All we can do is try to maximize our services as well as we can; as well as we can is still going to be miserable. You really do get what you pay for,” he said.

Koskinen’s remarks followed National Taxpayer Advocate Nina Olson who was even gloomier:“The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate {in 2001}; I’d love to be proved wrong, but I think it will rival the 1985 filing season when returns disappeared.”

There are five key factors at play – complicating the upcoming filing season (that’s when you file your 2014 tax return). The IRS agency budget is the number one challenge, Koskinen said. The House has voted to cut the IRS budget for 2015 by $341 million, and the Senate has proposed to increase it by $240 million—that would still be 7% below 2010 funding levels.

In the meantime, Congress keeps passing laws that the IRS has to implement, namely the Affordable Care Act (“ACA”) and the Foreign Account Tax Compliance Act (“FATCA”). For example, Koskinen said the IRS requested $430 million in 2014 from Congress to implement the ACA but got zero, forcing it to take money out of enforcement and taxpayer services budgets.

This will be the first filing season with two major provisions from the Affordable Care Act –the premium tax credit and the individual shared responsibility payment–on Form 1040. National Taxpayer Advocate Olson said she’s very concerned about the IRS receiving accurate information from the health exchanges. It won’t be the IRS’s fault, but taxpayers will likely put the blame on the IRS. Koskinen touted the web pages that the IRS has created to help explain the ACA tax provisions.

Olson expects that implementation of FATCA, which affects taxpayers with accounts overseas, will also cause trouble this filing season. A new withholding requirement will mean there will be an issue with taxpayers trying to get refunds back in a timely manner. “If they are overseas, who are they going to call? There is not toll free number,” Olson said.

Then there are the tax extenders, 50-plus laws whose fate is uncertain. Congress has vowed to vote on the future of these laws in the upcoming lame duck session. But Koskinen warns that if the uncertainty continues into December, it could delay the start of the filing season and delay tax refunds.

Another factor Koskinen ticked off complicating this year’s filing season will be that the IRS is implementing a voluntary oversight program for return preparers. He said he’s still pushing for a mandatory oversight program. In the meantime, there will be a page on the IRS web site with a database of qualified tax preparers, including unregulated preparers who chose to participate in voluntary education programs. Attorneys, CPAs and enrolled agents, who all have separate licensing requirements, will also be listed.

Is there any promising news? Taxpayers are flocking to the IRS’s Where’s My Tax Refund feature where you can click and track the progress of your federal refund. They’re also using IRS direct pay, a secure online option for making tax payments (I use it; it really is quick and easy).

In the future (“some years from now”) Koskinen evisions a complete online tax filing experience. Taxpayers would have an account online where you could log on securely, see documents the IRS has received on your behalf, see your previous filings, and if there is an issue with your return, the IRS would contact you immediately—not two or three years down the line. “It’s not illusory,” he inists, adding that once more activities are moved online, the agency could sustain itself without annual budget increases.


The 2014 tax breaks you’ll be able to take

Originally Posted on CNN Money

Well, finally.

Congress on Tuesday night extended dozens of expired “temporary” tax breaks for 2014.

It took the Senate, by a 76 to 16 vote, until the week after Congress was supposed to adjourn to pass the bill, which the House had already approved.

The bill will now be sent to President Obama, who is expected to sign it.

The majority of tax breaks in the bill pertain to businesses, but a handful will affect individuals.

Among those who will benefit from the retroactive extension to January 1, 2014: Teachers who buy classroom supplies, mass-transit commuters, residents of states with no income tax, parents with kids in college, some homeowners and some retirees with IRAs.

The bill also includes a new provision that will benefit disabled adults.

What’s not clear yet is whether passage of the tax extenders bill so late in the year will force the IRS to delay when you can start filing your 2014 taxes, which typically begins in mid-January.

But whenever tax season starts, here are the extended tax breaks that you can take on your 2014 tax return:

Deduction for teachers’ expenses: This measure lets school teachers deduct up to $250 for the costs of classroom supplies that they buy with their own money. It’s available to all teachers, whether they itemize or not.

Equal treatment of commuting costs: All commuters may reduce their pre-tax income to account for their commuting costs. Under the law, however, those who drive to work and pay for parking are allowed to exclude more ($250 per month) than those who use mass transit ($130 per month). This measure again provides parity by also allowing mass transit riders to exclude $250 per month.

State and local sales tax deduction: If you itemize your taxes, this measure lets you deduct the state and local sales taxes you’ve paid in lieu of state income taxes.

The deduction can be a boon for itemizers who live in Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Those are the seven states that don’t impose an income tax but where residents pay sales taxes, either at the state or local levels.

Tuition deduction: Among the many education tax breaks on the books, this one is available to all tax filers, whether you itemize or not. With it, you may deduct up to $4,000 in qualified tuition, fees and related expenses for post-secondary education, such as college and graduate school. The deduction may be taken for yourself, your spouse or your dependents.

But there are income limitations, and if you take it you may not take other types of education tax breaks, such as the Lifetime Learning Credit. Your deduction also is reduced by any grants and scholarships received to pay for school, as well as any money withdrawn from tax-advantaged, education savings accounts.

Deduction for mortgage insurance premiums: If you only put down a small amount to buy a home you may be required to pay for mortgage insurance to protect the lender against default. This tax break lets you deduct the cost of your premiums if you itemize your deductions.

Income exclusion for mortgage debt that’s been forgiven: When you sell your home for less than what you owe the bank or your home is foreclosed, the bank may agree to forgive the remaining debt you owe. But the IRS typically treats that forgiven debt as taxable income to you. This tax break lets you exclude it from your income.

Tax-free IRA withdrawals for charity: With this measure, anyone over 70-1/2 may take tax-free distributions of up to $100,000 from a traditional IRA if the money is distributed directly to an eligible charity.

While retirees can’t also take a deduction for that contribution, the money won’t count as income. So it won’t hurt when it comes to other taxes, such as those imposed on Social Security benefits when income exceeds a certain level, said Mark Luscombe, principal federal tax analyst for tax publisher WoltersKluwer, CCH.

Tax-free savings for people with disabilities: Attached to the extender bill is the Achieving a Better Life Experience (ABLE) Act. That act will permit people who were disabled before the age of 26 — as well as their family and friends — to contribute up to a combined total of $14,000 a year to an ABLE account.

Earnings would grow tax free and the money would not disqualify the disabled person from receiving federal assistance benefits such as Medicaid and Supplemental Security Income so long as it is used to pay for housing, transportation, education and wellness.


Obamacare Tax Problems to Watch Out For

Originally Published in ACCOUNTINGTODAY.COM

Affordable Care Act-related tax issues await CPAs and those who prepare their own returns this upcoming tax season, according to the National Conference of CPA Practitioners.

Medical Mysteries

There has been very little clarity about many ACA policies, leaving significant opportunities for error as people try to carve out their own interpretations. Businesses and individuals will be required to be compliant, but the reality remains that many may not know how to go about achieving this goal. Here are some ACA tax issues that NCCPAP feels CPAs and their business and individual clients should know about now.

Employer Shared Responsibility

Effective Jan. 1, 2015, one of the main provisions of the Affordable Care Act—employer shared responsibility—will begin. This means all employers with 100 or more employees are required to offer health insurance. Further, all employers will have required reporting for 2015. All employers will need to file the Form 1095-C with both the IRS and their employees by the end of January 2016. This form will provide essential information for employees to prepare their taxes. Specifically, it will verify the months that each employee had minimum essential coverage.

Minimum Essential Coverage

There are no mandatory ACA employer filing requirements for 2014. The IRS is telling CPAs to use their best judgment to determine if a person had minimum essential coverage, which is a bronze plan, but also requires an individual to have had coverage for all 12 months.

Careful Before Checking the Box

If taxpayers are preparing their own returns, many may mistakenly check the box that affirms they did have minimal essential coverage, even in cases when that is not accurate. This is because individuals either don’t know what minimal essential coverage entails, or are intentionally trying to avoid a penalty

Avoid the Penalty

For example, those who had insurance for half the year with an employer, but who were unemployed for half the year without health insurance, might think they had minimal essential coverage. In this situation they would be wrong since each person is required to have coverage for all 12 months to avoid paying a penalty. 

Truth or Dare

There is no way the government will be able to verify whether or not a person is telling the truth because employers have no mandatory reporting requirements for 2014. Even if someone had purchased an individual plan on their own, since the health insurance companies have no reporting requirements for 2014, there is no way for the government to verify whether someone had an individual plan or had no insurance at all.

Watch the Timeframe

If someone purchased health insurance on the exchange, the government would be able to prove the months they were covered with the exchange-purchased insurance through Form 1095-A. For example, if an individual were uninsured for six months and covered with exchange-purchased insurance for six months, the government would only be able to see the timeframe the individual had exchange-purchased coverage. Essentially this person would not meet the minimal essential coverage guidelines and would be subject to a financial penalty—that is if the government had documentation to prove the gap in coverage, which it doesn’t.

Religious Exemptions

There is a lot of concern and confusion regarding all of the various ACA exemptions. Some are very clear: if you’re a member of a religious sect, such as the Amish, or a member of a federally recognized Native American tribe, you are exempt from minimal essential coverage. Some Catholic religious orders like nuns don’t need to have contraception coverage. Those are the basic and obvious exemptions.

Fuzzy Wording

Not all exemptions are that easy to interpret, according to Stephen Mankowski, CPA, who is the Tax Policy Chair for NCCPAP, and a partner in the Bryn Mawr, Pa., accounting practice, EP Caine & Associates. “Here is where it gets fuzzy,” Mankowski said. “You may be eligible for an exemption if you had financial difficulties, received shut-off notices, experienced the death of a close family member or were in prison for part or all of the year. In these situations, so much is left up to the taxpayer for interpretation. For example, how does one define financial difficulties, or a ‘close’ family member?  If you claim either of those, it could land you a cushy three-year exemption, according to ACA guidelines. Of course proving these in the event of an IRS audit could cause problems down the road.” Mankowski said. “There are many more exemptions beyond what I’ve listed here that will cause confusion to CPAs and the American taxpayer.”

Federal Repayments

“The repayment of premium tax credits is starting to get more attention,” said NCCPAP President Sandra G. Johnson, CPA, who runs a practice under her name out of Bellmore, N.Y.  “This is a conflict that has been underreported for a long time,” Johnson stated. “Now people are realizing for the first time that they had a premium discount for the health insurance premiums they paid in 2014 because their premium cost was based on their 2012 income. When their income increased in 2014, their premium tax credit decreased. These individuals are now going to owe the government money, and payback will occur through their 2014 federal tax return. More and more taxpayers will be faced with this sad reality.” Johnson is referring to how many taxpayers did not understand that their reasonable premiums were due to a government-offered discount based on the income they stated on their application (in many cases from their 2012 taxes). A higher 2014 income means taxpayers must now pay the government back for that premium discount that was initially credited to them if they are found ineligible.


Prosecutors Drop IRS Civil Forfeiture Case

Originally Published in ACCOUNTINGTODAY.COM

Federal prosecutors in Iowa have agreed to drop a controversial civil asset forfeiture case in which the Internal Revenue Service seized nearly $33,000 from the owner of a Mexican restaurant whose cash deposits at her bank had aroused suspicion of criminal activity.

The government moved to drop its case against Carole Hinders, who owned Mrs. Lady’s Mexican Food in Arnolds Park, Iowa, after hearing her sworn testimony last week, according to the Institute for Justice, a libertarian law firm that represented her in the case.

The Institute for Justice is the same group that won another high-profile case against the IRS last year, convincing a federal judge and an appeals court that the IRS’s effort to require mandatory testing and continuing education of tax preparers exceeded its statutory authority.

In the new case, the government will return all of the nearly $33,000 it seized from Hinders in 2013. The Institute for Justice teamed up with her in October to clear her name of any wrongdoing and get her money back.

However, the firm said the IRS is asking the court for the right to refile the case in the future and repeated its claim that the case was justified. The Institute for Justice plans to file a response, asking the court to deny the government any right to refile its case and clear the way for Hinders to get interest on the money that was seized.

“I actually wanted a trial, which would have cleared my name and helped to protect others, but it is good to get the money back,” Hinders said in a statement. “My fight is far from over, though. I am willing to tell my story to Congress to help change forfeiture laws so that no one else has to go through what I suffered.”

She may already have some support in Congress. Last week, the Republican and Democratic leaders of the tax-writing House Ways and Means Committee filed legislation to protect taxpayers against the inappropriate use of civil asset forfeitures by the IRS (see Congressmen Introduce Bill to Curb IRS Civil Asset Forfeitures).

Sen. Chuck Grassley, R-Iowa, the ranking member of the Judiciary Committee, also plans to introduce legislation in the Senate to curb the practice. Grassley is expected to become chairman of the Judiciary Committee in the next Congress. He is a senior member and former chairman and ranking member of the Finance Committee, with jurisdiction over the IRS.

“I’m working on civil asset forfeiture reform legislation to introduce in the new Congress,” he said in a statement Monday. “News reports including those in The Washington Post have detailed aggressive seizures of cash and property from drivers. In the case of the Iowa restaurant owner and others like it, the IRS has now adopted an enforcement policy under which it won’t seize assets under the structuring law without evidence of underlying criminal activity unless there are extenuating circumstances. I’m looking at ways to make sure the IRS and other federal agencies’ use of these statutes are reformed permanently going forward. Since the IRS changed its approach in these cases, it could change its approach again, and the same is true for other agencies. It’s important to look at getting the right policies set in statute going forward. The government’s power to seize assets should be used fairly and with common sense. The reforms I’m developing are meant to curb instances in which government power unfairly infringes on the rights of motorists, small business owners and other Americans.”

The IRS had seized Hinders’ money under the assumption that she had structured her restaurants bank deposits to keep them under $10,000 to avoid federal bank reporting requirements. Banks are required to file Suspicious Activity Reports if they see large cash deposits coming in over $10,000, but law enforcement also looks for patterns where depositors seem to be attempting to keep the deposits under the level required for the reporting. However, the IRS has indicated that it will not pursue new cases so aggressively.

The case has received significant attention from the press, including The New York Times and Des Moines Register. Hinders owned and operated Mrs. Lady’s Mexican Food for 38 years. The restaurant only accepted cash, which meant she made frequent cash deposits at the bank. Federal law requires banks to report cash deposits larger than $10,000. Since her deposits were less than $10,000, the government claimed she was deliberately making small deposits to evade the reporting requirement.

The IRS seized Hinders’ money using civil forfeiture, which allows law enforcement agencies to take cash, cars and other property without even charging the property owner with a crime. Carole has not been charged with a crime. The government has never claimed that any of the money that it seized from Hinders’ restaurant is the proceeds of illegal activity—only that civil forfeiture law allows them to seize money merely suspected of being involved in crime.

“The IRS should not be raiding the bank accounts of innocent Americans, and it should not take a team of lawyers more than 18 months to get it back when they do,” said Institute for Justice attorney Larry Salzman in a statement. “This case again shows why civil forfeiture laws have become one of the most serious threats to private property rights in the nation.”

“Instead of simply returning the money with interest and an apology to Carole for the nightmare they put her through, the IRS is shamefully attempting to mask their retreat by insisting on the right to refile the case in the future,” said IJ attorney Wesley Hottot. “This was an outrageous abuse from the start and the government should recognize that.”


Obama Threatens Veto of Emerging Tax-Break Agreement in Congress

Originally Published in ACCOUNTINGTODAY.COM

(Bloomberg) President Barack Obama would veto a tax-break agreement being negotiated in Congress by Senate Democrats and House Republicans.

“The president would veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families,” Jen Friedman, a White House spokeswoman, said in an e-mail today.

Lawmakers are nearing an agreement on extending U.S. tax breaks that lapsed at the end of 2013 and making others permanent. The proposal would add about $450 billion to the budget deficit over the next decade, said a Democratic aide.

A veto would require an override by two-thirds of lawmakers in the House and Senate, a high barrier for a deal that could draw opposition from some Democrats.

The biggest beneficiaries of the breaks would include corporations that conduct research, residents of states such as Washington and Texas that lack an income tax, and wind-energy producers concerned that their tax benefit would end all at once instead of being phased out. Tax breaks for low-income families that lapse at the end of 2017 wouldn’t be extended.

The tax break for corporate research, which would be expanded and made permanent, benefits companies including Intel Corp. and Johnson & Johnson. A benefit for small-business investments also would be locked in.

The plan would make permanent a provision allowing individuals to deduct state sales taxes, an issue important to Senate Democratic Leader Harry Reid of Nevada. In that state 22 percent of tax filers take advantage of the break, the second- highest percentage in the U.S., according to the Pew Charitable Trusts.

Wind Energy
The production tax credit for wind energy would be phased out over several years, said the aide, who spoke on condition of anonymity because the package wasn’t yet public.

A tax break for mass-transit commuters would be permanently extended as would a tax credit for college tuition, the aide said. Those are items championed by Senator Charles Schumer of New York, the third-ranking Senate Democrat.

Other breaks that may be made permanent include incentives for landowners to donate conservation easements and for individuals to make charitable donations directly from tax- advantaged retirement accounts.

Dozens of other tax breaks that expired at the end of 2013 would be continued through 2015. Among those that have lapsed are a provision that lets home sellers exclude from income the forgiven debt from short sales, as well as accelerated depreciation for motorsports tracks.

Child Credit
After reports of an emerging agreement yesterday, the Obama administration issued a statement signaling that it opposed a package that doesn’t extend expansions of the child tax credit and earned income tax credit that lapse at the end of 2017.

“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle-class families,” Treasury Secretary Jacob J. Lew said yesterday. “Any deal on tax extenders must ensure that the economic benefits are broadly shared.”

Congress returns on Dec. 1 to finish its post-election session, and lawmakers want to leave Washington by Dec. 11.

That time frame might make it difficult for Obama to veto any plan, especially because the Internal Revenue Service has warned that waiting could delay tax refunds next year.

If this proposal falls apart, House Republicans’ fallback plan is to extend the lapsed breaks through Dec. 31, 2014, Ways and Means Committee Chairman Dave Camp said yesterday.

That approach would require lawmakers to return to the issue next year, when Republicans will control the House and the Senate.


IRS Offers Rules on Hardship Exemptions from ACA Individual Mandate

Originally Published in ACCOUNTINGTODAY.COM

The Internal Revenue Service has issued a notice, regulations and other guidance related to the Affordable Care Act, including information on getting a hardship exemption from the individual mandate for health insurance coverage.

Notice 2014-76 provides a list of the hardship exemptions that taxpayers can claim on a federal income tax return without obtaining a hardship exemption certification from the health insurance marketplace.

Under the Affordable Care Act, for each month beginning after Dec. 31, 2013, Section 5000A of the Tax Code requires individuals to either have minimum essential health coverage for themselves and any nonexempt family member whom the taxpayer can claim as a dependent, qualify for an exemption, or include an individual shared responsibility payment with their federal income tax return.

An individual is exempt from the requirements for a month if he or she has a hardship exemption certification issued by the health insurance marketplace certifying that the person has suffered a hardship affecting their ability to obtain minimum essential coverage that month.

The IRS simultaneously released Revenue Procedure 2014-62, which announces the indexed applicable percentage table for calculating an individual’s premium tax credit for taxable years beginning after 2015. The document also announces the indexed required contribution percentage for determining whether an individual is eligible for affordable employer-sponsored minimum essential coverage for plan years beginning after 2015.

The same Revenue Procedure cross-references the required contribution percentage, as determined under guidance issued by the Department of Health and Human Services, for determining whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage, beginning after 2015.

In addition, the IRS issued TD 9705, finalizing its regulations for minimum essential coverage and other rules regarding the individual shared responsibility payment, also known as the individual mandate.