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Anyone who prepares all, or substantially all, of any federal tax return or refund claim for compensation is required to obtain a preparer tax identification number (PTIN). Tax return preparers with a valid PTIN who do not obtain a record of completion as part of the Annual Filing Season Program, or are not an attorney, CPA, enrolled agent, ERPA or enrolled actuary, may still prepare tax returns, but will not be included in the public directory.

In 2011, the Treasury Department and the IRS issued regulations that mandated testing and CE for paid tax return preparers and created a Registered Tax Return Preparer (RTRP) credential. The RTRP designation was for preparers with valid PTINs, who passed an IRS competency test and completed 15 hours of CE.

Earlier this year, the Court of Appeals for the D.C. Circuit upheld the lower court’s determination that the IRS regulations from 2011 mandating competency testing and CE for paid tax return preparers were invalid. The IRS continues to believe regulation of paid tax return preparers is important for the proper functioning of the U.S. tax system. To that end, the Administration’s Fiscal Year 2015 Budget includes a proposal to explicitly authorize the IRS to regulate all paid tax return preparers.

Prior to the 2013 court decision, over 62,000 return preparers passed an IRS-administered competency test and completed the requirements to become Registered Tax Return Preparers. The Annual Filing Season Program will exempt RTRPs and others who have successfully completed certain recognized national or state tests from the filing season refresher course that will be required for other participants.

The Annual Filing Season Program will be an interim step to help taxpayers and encourage education for unenrolled tax return preparers. The IRS will assess the feasibility of administering a uniform voluntary examination in future years in order to ensure basic return preparer competency.

Remarks from Beanna

New Annual Filing Season Program

The Internal Revenue Service has announced a new voluntary program designed to encourage education and filing season readiness for paid tax return preparers. The program will be in place to help taxpayers during the 2015 filing season.

The Annual Filing Season Program will allow unenrolled return preparers to obtain a record of completion when they voluntarily complete a required amount of continuing education (CE), including a course in basic tax filing issues and updates, ethics and other federal tax law courses.

“This voluntary program will be a step to help protect taxpayers during the 2015 filing season,” said IRS Commissioner John Koskinen. “About 60 percent of tax return preparers operate without any type of oversight or education requirements. Our program will give unenrolled return preparers a way to stay to up-to-date on tax laws and changes, which we believe will improve service to taxpayers.”

Tax return preparers who elect to participate in the program and receive a record of completion from the IRS will be included in a database on IRS.gov that will be available by January 2015 to help taxpayers determine return preparer qualifications.

The database will also contain information about practitioners with recognized credentials and higher levels of qualification and practice rights. These include attorneys, certified public accountants (CPAs), enrolled agents, enrolled retirement plan agents (ERPAs) and enrolled actuaries who are registered with the IRS.

“It’s also important to note this program is not to replace the important tax work done by certified public accountants, enrolled agents and attorneys,” Koskinen said. “Tax professionals with recognized credentials will be publicly listed on IRS.gov, and we plan to help inform taxpayers about the professional options available.”

Monthly Newsletter for ncpeFellowship Members Vol. 5 No. 9 September 2014

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In general, non-exempt return preparers with a valid PTIN for the program year will need to complete 18 hours of CE annually from IRS-approved CE providers to obtain an IRS record of completion. The hours will need to include:

• 6 hours of federal tax filing season refresher course (witha required comprehension test at completion)• 10 hours of federal tax law topics• 2 hours of ethics

For the first year, a transition rule will apply to prorate the required hours. For a return preparer to obtain a record of completion for the 2015 filing season, a total of 11 hours will need to be earned in 2014, including the six hour refresher course, three hours of other federal tax law topics and two hours of ethics.

The IRS will begin issuing records of completion to those who have met the requirements in mid-October 2014 after the 2015 PTIN renewal season starts.

As a prerequisite to receiving a record of completion, an individual will be required to consent to the duties and restrictions relating to practice before the IRS in subpart B and section 10.51 of Treasury Department Circular No. 230.

Effective for tax returns and claims for refunds prepared or signed after Dec. 31, 2015, only unenrolled tax return preparers who have a record of completion under the Annual Filing Season Program for the calendar year of preparation and the calendar year of representation will be permitted to represent taxpayers before the IRS during an examination of a return that they signed or prepared.

Attorneys, CPAs and enrolled agents will continue to have unlimited representation rights and can represent clients before any office of the IRS.

Return preparers who can obtain the AFTR – Record of Completion without taking the AFTR course are:

• Anyone who passed the Registered Tax Return Preparertest administered by the IRS between November 2011and January 2013.• Established state-based return preparer programparticipants currently with testing requirements: Returnpreparers who are active members of the Oregon Board ofTax Practitioners and/or the California Tax EducationCouncil.• SEE Part I Test-Passers: Tax practitioners who havepassed the Special Enrollment Exam Part I within the pasttwo years as of the first day of the upcoming filing season.• VITA volunteers: Quality reviewers and instructors withactive PTINs.• Other accredited tax-focused credential-holders: TheAccreditation Council for Accountancy and Taxation’sAccredited Business Accountant/Advisor (ABA) andAccredited Tax Preparer (ATP) programs.

Those who are exempted from the AFTR course must meet

the alternative requirements (15 hours of IRS-approved CE, consent to Circular 230 practice requirements and a valid PTIN for the upcoming filing season) in order to receive an AFSP Record of Completion. Once all requirements are met, the exempted return preparer will automatically be issued a Record of Completion.

A return preparer will not be required to notify the IRS of an exemption. The IRS is obtaining information about exemptions directly from the testing source (e.g. Oregon Board of Tax Practitioners).

To be eligible for an AFSP – Record of Completion, a return preparer must complete and pass the AFTR course and obtain their other CE by December 31 prior to the start of the tax season. As AFTR courses are offered by CE providers, return preparers are subject to the schedule of courses offered by these providers.

In no circumstance will the AFSP – Record of Completion be issued before a return preparer has registered or renewed their PTIN for the upcoming year.

This program is not designed, directed or intended for credentialed preparers who already possess a much higher level of qualification. However, if a credentialed preparer seeks to participate in the program, he or she would be required to meet the same requirements as those preparers in the exempt category.

As a PTIN holder you will continue to have limited representation rights before limited offices of the IRS with respect to clients whose return you prepared and signed for calendar year 2015. However, beginning in 2016, only AFSP participants who obtain a Record of Completion will have those limited representation rights before the IRS for clients whose returns they prepared and signed. PTIN holders without an AFSP - Record of Completion or without other professional credentials will not be able to represent clients before the IRS in any matters.Attorneys, CPAs and enrolled agents will continue to have unlimited representation rights and can represent clients before any office of the IRS.

It is a voluntary program. Anyone with a preparer tax identification number (PTIN) can prepare tax returns for compensation, but continuing education is encouraged for all tax return preparers.See the chart below for a summary of the program requirements for the first year vs. future years:

In addition to being included in the new public directory of tax return preparers launching in 2015, the AFSP – Record

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of Completion differentiates you in the marketplace. The IRS intends to launch a public education campaign in 2015 encouraging taxpayers to select return preparers carefully and seek those with professional credentials or other select qualifications.

Also, beginning in 2016, there will be changes to the representation rights of return preparers.

Attorneys, CPAs, and enrolled agents will continue to be the only tax professionals with unlimited representation rights, meaning they can represent their clients on any matters including audits, payment/collection issues, and appeals.

AFSP participants will have limited representation rights, meaning they can represent clients whose returns they prepared and signed, but only before revenue agents, customer service representatives, and similar IRS employees, including the Taxpayer Advocate Service.

PTIN holders without an AFSP – Record of Completion or other professional credential will only be permitted to prepare tax returns. They will not be allowed to represent clients before the IRS.

The above is a summary of the information provided by the Internal Revenue Service regarding this new program to regulate return preparers. Questions remain. While “regulation of return preparers” was determined to not be the authority of the IRS in Loving v. Commissioner, the AICPA has already filed a law suit to prohibit the IRS from moving forward on this program. However, as with the RTRP designation, time is on the side of the IRS. Revenue Procedure 81-38 allows tax return preparers to represent their clients at the initial IRS examination. This Rev. Proc. has been superseded by Rev. Proc 2014-42 which requires tax professionals to complete the Annual Filing Season Program to continue this privilege.

Over ten years ago I testified before the U. S. Department of Treasury over this issue, stating that the return preparer knows best how and why the return was prepared as it was and the privilege of representation at the initial examination should continue. I further noted that if this privilege was taken away, the IRS could never assess a paid preparer penalty on the return preparer because of insufficient due process. Treasury then decided to continue the limited right of practice for return preparers who signed the return.

My questions - How can this Annual Program, where tax professionals must test each year be VOLUNTARY, when if they do not participate they loose their right to represent their clients. The word “voluntary” means, according to Webster, “done of one’s own free will without valuable consideration or legal obligation.”

And for the Registered Tax Return Preparers (RTRP) who are guilty of nothing but trying to comply with the ill-fated plan of IRS, in 2016 they are non-existent, will be written out of Circular 230 and out of Form 2848 - Power of Attorney, to once again

be subjected to the fancies of IRS.

We all know that the business of tax is a haven for those who would abuse the system, but IRS must get real about their approach to resolving the problem. I suggest:

#1. Instead of threatening good preparers, dedicate staff to finding and taking bad preparers off the street.

#2. Scrutinize Electronic Return Originators (EROs), identifying and suspending them from the e-file program for abuse.

#3. Give tax professionals a “hot line” to report abusive tax preparers and staff the hotline with employees who will investigate and take the proper actions.

#4. IRS should analyze the return preparation industry and identify the areas most problematic and along with the assistance of the Department of Justice, incarcerate abusive individuals.

#5. Software companies must limit the number of returns done on one purchased software tax package and IRS should send postcards to any taxpayer whose return is “self-prepared” inquiring if an individual assisted in the return preparation for a fee and requesting the details on the individual who did not sign the return as the paid preparer.

The IRS must recognize that the business of tax is an honorable profession and we are a field force of compliance the Commissioner of the IRS can neither hire or afford.

Without the dedicated people in the business of tax our system of voluntary tax assessment would fail. We are the glue that holds effective tax administration together. We ask little other than to be treated fairly and respected for our contributions.

As ncpe did with the RTRP program, ncpe has partnered with ExamMatrix for the 6 hour course and testing to participate in the Annual Filing Season Program. Be sure and check the “Sponsor of the Month” at the end of the newsletter.

Beanna

Beanna@ncpefellowship.com or 877-403-1470

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Use Resources and Toolsfor Tax Professionals

On Our WebsitencpeFellowship.com

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Table Of Contents (Page)

Remarks from Beanna (1)

Tax News (6)How Obamacare Could Make Filing Taxes a Nightmare (6)Companies Desperate to Avoid ObamaCare ‘Cadillac tax’ Shifting Costs to Workers (7)Corporate Inversions: Potential Use of Executive Authority Pending Congressional Action (8)The Social Security Earnings Test Is Not A Tax (9)

Washington Developments (10)Judges Say Senate Can Launch Tax Bills (10)

A Legislative Update from Capital Hill (12)House Committee Recommends Big Changes for the IRS (12)Senators Introduce Bill to Prevent Tax Refund Theft (13)Congress Considers Regulating Tax Preparers (14)Don, the Estate and Trust Guy (15)“Make a ‘Portability’ Election for Your Decedent Spouse” (15)

People in the Tax News (15)Former IRS Employee Arrested in Identity Theft Ring (15)IRS Tells Judge It Couldn’t Save Data on Lois Lerner’s Computer (16)Robert Redford Sues New York Over $1.6 Million Sundance Tax Cloud (16)Tax Relief Company Agrees to Turn over $16 Million to Bilked Consumers (17)First Circuit Affirms Deduction of Fraud Penalty Settlement By Government Contractor (17)Vanessa Williams Faces IRS Tax Lien (18)Ex-IRS Official Lois Lerner Called Conservatives ‘Crazies’ (18)Man With Offshore Account Pleads Guilty To Hiding $1.1 Million From IRS (19)Inmates Charged in Tax Fraud Scheme (19)

IRS News (20)IRS Recovers $576 Million in Erroneous Tax Refunds from Outside Leads (20)GAO Analyzes Increasing Number of Large Partnerships and IRS Difficulties Auditing Them (21)Updated Power of Attorney Form Can Not Be Filed Electronically, Contains Several Changes (22)Recently Issued Income Tax Statistics Reflect 8.7% Rise in Taxpayer Income for 2012 (23)Whistleblower - Informant Award (24)Treasury Inspector General for Tax Administration Office of Audit (24)

Tax Pros in Trouble (25)Texas Resident Charged with Tax Fraud and Financial Institution Fraud (25)Guilty Plea In One Of The Largest, Longest Running Tax Fraud Schemes Ever (26)Justice Department Sues to Stop South Florida Tax Return Preparer Engaged in Fraud and Earned Income Credit Schemes (26)

Ragin Cagin (27)Capitalization Regulations Provision Can Increase Asset Expensing (27)

Taxpayer Advocacy (28)No Disclaiming Federal Tax Liability (28)New IRS Appeals Process Starts September 2, 2014 (28)Audit Tip - Automobile Mileage (29)How Does Information Get On a CARFAX Report? (29)

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International Tax (30)United States Income Tax Treaties - A to Z (30)

State News of Note (30)State Fails To Force Electronic Payments On Taxpayer With Hacking Concerns (30)New York State And City Residency Rules Create Tax Traps For The Unwary (31)New York State Suspends Return Preparers (32)

Wayne’s World (32)The Premium Tax Credit (32)

Letters to the Editor (33)

Sponsor of the Month (34)ExamMatrix (34)

Tax Jokes and Quotes (35)

Seminars:Listing of 2014 NCPE Seminars

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Tax News

How Obamacare Could Make Filing Taxes a Nightmare

This tax season will be a messy one for most of Obamacare’s 8 million enrollees.

Individuals and families who bought subsidized coverage have been receiving tax credits based on whatever amount they thought they would earn this year. Upon filing taxes, the IRS will reconcile the amount of subsidy received, based on expected income, with the person’s actual income.

That’s where things can get ugly.

If the person underestimated their income for the year — and got a higher subsidy than they actually deserved — they’ll owe the government the difference. But if they overestimated their income, and received too small a subsidy, they’ll see a bigger tax return.

Since most Obamacare enrollees are expected to have significant changes in their incomes, this could be a significant problem.

“Income volatility is much higher among those who were uninsured before reform than among those who had insurance,” says George Brandes, vice president for health care programs at Jackson Hewitt Tax Service. “Many people with stable, salaried jobs already had health insurance through their employers.”

In a 2013 Health Affairs paper, economists estimated that over 98 percent of enrollees on the California exchange would have some change in their income from one year to the next (they looked at 2018 and 2019).

Their analysis suggests that 38.4 percent of enrollees receiving subsidies would owe the government some kind of repayment if individuals never reported income changes to the exchange. Another 41 percent would receive tax refunds,

because they would become eligible for bigger subsidies over the year. People can reduce these uncertainties by updating their information if and when their income changes.

The health law places limits on how much tax credit reconciliation could slam most enrollees. The limit ranges from $600 for low-income families up to $2,500 for those who earn more. Though capped, these sums still represent substantial financial shocks to low-income families.

“From Jackson Hewitt’s perspective, the repayment liability caps do offer consumers some level of protection and predictability,” Brandes said. “We have some sense of the order of magnitude that this is going to have on our customers.”

“things can be done to reduce taxable income. There’s a role for the tax-preparing industry here, in terms of good planning.”

But if income for the year was over 400 percent of the federal poverty line (about $95,000 for a family of four), the family is obligated to repay the subsidy in its entirety when filing taxes.

“One number in that study that really jumps out: 19 percent of households between 250 and 400 percent of the federal poverty line could wind up above that 400 percent threshold, which means the caps wouldn’t apply to them. Then they’re on the hook for the full face value of the tax credit,” Brandes said. “That’s one group where we’re paying particular attention.”

Perhaps softening the impact, repayments owed for overly-generous subsidies would take the form of lower tax refunds for many families.

“Having to repay a health insurance exchange subsidy might not necessarily mean that money will be owed to the IRS,” the Health Affairs authors write. “Of the 132 million Americans who filed income tax returns in 2009, 83 percent received refunds, and 17 percent owed additional taxes.”

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arrangements as wellness programs, including losing weight or stopping smoking.

Meanwhile, employers are shifting workers into plans with higher deductibles, just as ObamaCare does in the health care exchanges, and using health savings accounts to help defray the costs.

Another cost saver, Marcotte added, is to increase premiums for spouses who have access to other plans.

“If the spouse has coverage through their own employers, employers are beginning to charge more if they elect to stay on their employee’s plan rather than go with the spouse’s plan.”

Rosemary Gibson of the Hastings Center said, “Employees are going to be paying more and more of their income for health care. And the same with people even on these exchanges if they don’t get subsidies.”

The “Cadillac tax” was originally intended to take effect sooner, but unions and other groups convinced officials to delay it until 2018, reducing the anticipated income from $137 billion to $80 billion over ten years. But many analysts predict it will be far less than that.

Henry Aaron of the Brookings Institution said, “before then, it’s expected that most of the businesses that offer that form of insurance will back off and make the insurance less generous, so the tax won’t bite.”

Robert Laszewski of Health Policy and Strategy Associates said he doubted many will end up paying the tax.

“What we’re finding is almost no employers are going to be hit by this ‘Cadillac tax.’ You’d be stupid to get hit by this ‘Cadillac tax,’” he said. “They’re all cutting their benefits right now.”

One analyst noted the tax had less to do with health care than it did with revenue.

“The ‘Cadillac tax’ is not about health care, it’s about the money. It’s about getting the money,” said Dan Mendelson of Avalere Health.

“All of this illustrates how challenging it is to subsidize health insurance for low- and middle-income families through the tax system,” said Larry Levitt, a vice president at the Kaiser Family Foundation.

The best thing for individuals and families to do is update their information within the health insurance exchange as soon as something changes. They have to do that through the actual exchange interface — which will have a section for changes in income or family circumstances — not through their insurer. Instructions for updating information on Healthcare.gov can be found here.

If people reported their income changes to insurers and had tax credits adjusted in a timely fashion, the number of people owing repayment would fall by 7 to 41 percent, and the size of the average repayment could be reduced by up to 61 percent, authors of the Health Affairs report found.

Enrollees can also take steps before the tax-filing process, especially if they’re near the cutoff where the repayment caps no longer apply.

“There are things that can be done to change someone’s modified adjusted gross income — you can make contributions to tax-preferred retirement vehicles, for example,” Brandes said. “That can reduce your taxable income and push you back down into the tax credit range that allows you to benefit from the cap. There’s a role for the tax-preparing industry here, not just in doing the reconciliation but also in terms of good tax-planning.”

The key to smoothing these problems is education and outreach, but that’s easier said than done. According to recent polling from the Kaiser Family Foundation, an estimated 40 percent of people receiving insurance subsidies don’t actually realize the cost of their coverage is being offset by financial assistance from the federal government.

According to the same poll, over half of enrollees who did report receiving subsidies are concerned that their income will change and they will no longer be eligible for this financial help.

Companies Desperate to Avoid ObamaCare ‘Cadillac tax’ Shifting Costs to Workers

A national business group representing the nation’s large employers reported Wednesday that companies desperate to avoid a 40 percent ObamaCare “Cadillac tax” are finding ways to shift the costs to workers.

The so-called “Cadillac tax,” now four years away, will affect health plans that spend more than $10,200 per worker.

“The excise tax, when it hits in 2018, will affect both employers and employees,” said Brian Marcotte, president of the National Business Group on Health.

Employees will get incentives to reduce costs through such

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But if employers are able to avoid it and less than expected is collected, ObamaCare could fall tens of billions short in paying for itself as promised.

Meanwhile, the administration has sent letters to 310,000 people signed up for the exchanges threatening to cut off their insurance if they don’t submit missing verification of their citizenship by September 5.

At the same time, Rep. Diane Black, R-TN., sent a letter to the Department of Health and Human Services Wednesday noting that its own Inspector General had found “1.2 million applicants have unresolved inconsistencies related to income verification.”

She pointedly asked if there was an action plan or a deadline to deal with them, noting $17 billion will be paid in subsidies this year alone.

Corporate Inversions: Potential Use of Executive Authority Pending Congressional Action

With Congressional action appearing unlikely, a number of lawmakers have urged the White House to use its executive authority to curb corporate inversions. The issue has been gaining traction over the past few weeks, and while the Administration has expressed a preference for Congress to address the issue, an Administration spokesman has indicated that nothing has been ruled out at this point

In corporate inversions (also called “expatriation transactions”), a U.S. corporation becomes a wholly-owned subsidiary of a foreign corporation (through a merger into the foreign corporation’s subsidiary) or transfers its assets to the foreign corporation. If the transaction is respected, U.S. tax can be avoided on foreign operations and distributions to the foreign parent, and there are opportunities to reduce income from U.S. operations by payments of fees, interest, and royalties to the foreign entity.

Under Code Sec. 7874, which was added to the Code in 2004 to address an inversion-related loophole, a foreign corporation is treated as a U.S. corporation for all purposes of the Code where, under a plan or series of related transactions:

(1) the foreign corporation completes, after Mar. 4, 2003,the direct or indirect acquisition of substantially all theproperties held directly or indirectly by a U.S. corporation;

(2) shareholders of the U.S. corporation obtain 80% ormore of the foreign corporation’s stock (by vote or value)by reason of holding their U.S. shares; and(3) the foreign corporation and corporations connected toit by a 50% chain of ownership (the “expanded affiliatedgroup”) don’t have substantial business activities in theforeign corporation’s country of incorporation or organization when compared to the total business activities of the group.(Code Sec. 7874(b); Code Sec. 7874(a)(2))

In order to avoid being treated as a U.S. corporation under

the above rules, the resulting entity must be more than 20% foreign-owned. Practically speaking, this means that the target foreign company must be at least 25% the size of the U.S. corporation.

However, where the inversion transaction satisfies the above three tests, except that the domestic corporation’s shareholders (or a domestic partnership’s partners) obtain at least 60% but less than 80% of the foreign corporation’s stock, the foreign corporation is a “surrogate foreign corporation” respected as a foreign corporation. (Code Sec. 7874(a)(2)) For a more detailed background, including the consequences of being a surrogate foreign corporation and the tax consequences to U.S. shareholders.

Corporate inversions became a mainstream news topic earlier this year, specifically with Pfizer’s attempted takeover of AstraZeneca (see Weekly Alert ¶ 45 05/22/2014) and U.S. medical device maker Medtronic’s merger with Irish competitor Convidien . More recently, U.S. drug maker Abbvie announced its merger with Ireland-based drug maker Shire. There has also been talk that Walgreen, Inc., the American drugstore company, was planning a takeover of Alliance Boots (domiciled in Switzerland), but recent reports indicate that the plan won’t involve Walgreens shifting its corporate citizenship abroad.

When Pfizer was prominently featured in the news, Rep. Sander Levin (D-MI) and Sen. Carl Levin (D-MI), each with a number of co-sponsors, introduced companion legislation in the House and Senate, respectively, which would be effective for inversions completed after May 8, 2014. Similar to the President’s proposal, the bills would reduce the current 80% threshold to a more-than-50% threshold, and the bills also contain provisions that would bar companies from shifting tax residence offshore if their management and control and significant business operations remain in the U.S. These bills have thus far failed to advance, with many key lawmakers instead calling for comprehensive corporate tax law reform to make the U.S. a more attractive place to do business.

On August 5, Senators Jack Reed (D-RI), Dick Durbin (D-IL), and Elizabeth Warren (D-MA) sent a letter to President Obama in which they stated that, while they “are working with our colleagues in Congress to pass legislation as soon as possible to eliminate tax breaks for inverted corporations,” these efforts “should not preclude executive action to prevent corporate inversions.” They urged the President to use his authority “to stand up for American companies which are proud to be part of our nation and reduce U.S. incentives for other corporations which would abandon their responsibilities to their country for a nod of approval from Wall Street.”

On August 5, during a press briefing, White House Press Secretary Josh Earnest was questioned about whether the President would use executive action to stop corporate inversions. Although he declined to say with any certainty whether the President would take any unilateral action, he said that “it is our view that Congress should take the necessary step to address this loophole.”

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What is far less obvious to most people, however, is that the earnings test is not a tax at all. Every dollar that is subtracted from a retiree’s Social Security check gets credited back to the same individual – with interest – in the form of higher future benefits. Indeed, because Social Security uses an interest rate that currently exceeds those available from CDs and savings accounts, the average beneficiary subject to the earnings test actually ends up being made better off by this provision!

Sadly, this is not well understood. A few years ago, the AARP conducted a survey in which they asked people what would happen to a hypothetical 63-year old who continues to earn $40,000 per year while collecting benefits. Of respondents in the age 55-66 age range, four out of five correctly answered that the individual would see their benefits reduced. Sadly, however, 3 out of 5 respondents believed this was a permanent loss of benefits that the individual would never get back. In other words, many respondents view the earnings test as a very large tax.

The answer, it turns out, is yes. Individuals reduce their labor supply in response to the earnings test, a decision that has real economic consequences. By viewing it as a tax, people believe that the net financial returns from working are much less than they actually are on a lifetime basis. This is not idle speculation: research presented yesterday at the Retirement Research Consortium in Washington provided new evidence on this important question. Researchers from Berkeley, the University of Chicago, and Indiana University studied the actual labor supply behavior of individuals subject to the earnings test. In their summary of their research, the authors state that if the earnings test were eliminated for ages 62-64, “the fraction working at age 63 would increase by several percentage points.”

This is truly unfortunate. With life expectancies on the rise and widespread questions about the extent to which individuals are adequately preparing for retirement, the last thing we should be doing is encouraging people to retire early. We sometimes accept such distortions in labor supply in other contexts as an unavoidable cost of raising tax revenue needed to support public expenditures. But in this case, we get all the pain (labor supply distortions) and none of the gain (because it raises no revenue).

In an ideal world, we would find a way to more effectively communicate this provision to retirees so that they make their labor supply decisions based on accurate information. Given the cost and difficulty of trying to get this message out to millions of Americans every year, however, the easier solution may be for Congress to simply get rid of the earnings test completely.

Until that happens, spread the word: the earnings test is not a tax.

Reports indicate that the Treasury is actively exploring options that the Administration could take. Rep. Levin, in response, has said that “the discussion of possible administrative actions should not be an excuse for Congress to drag its feet.”

According to a former Treasury official, one way that the Administration could unilaterally curb corporate inversions pending Congressional action would be to exercise its authority under Code Sec. 385, which authorizes IRS to prescribe regs to determine whether an interest in a corporation is debt or equity. Harvard professor Stephen Shay claims that, under that section, the Administration could limit the ability of inverted companies to take interest deductions in the U.S. or access their foreign cash without first paying U.S. taxes (i.e., the U.S. tax due upon “repatriating” foreign-earned income). According to Shay, by reclassifying debt as equity, a formerly deductible interest payment would be reclassified as a dividend for which no deduction may be claimed-resulting in a greater portion of income being taxable at U.S. corporate rates.

The Social Security Earnings Test Is Not A Tax

Social Security rules, like the U.S. tax laws, are complex. Consequently, they are often misunderstood. Sometimes, this misunderstanding is costly for individuals and for the economy.

A leading example is a Social Security policy known as the “Earnings Test.” This provision applies to individuals who claim their Social Security benefit before their Normal Retirement Age but who continue to earn income above a threshold ($15,480 in 2014). The amount of the reduction is quite large: one’s benefit check is reduced by 50 cents for every dollar earned over the threshold. It is therefore not surprising that people notice this reduction and think of it as a 50% tax on earnings over and above ordinary income taxes.

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Washington Developments

Judges Say Senate Can Launch Tax Bills

A three-judge panel of the D.C. Circuit Court of Appeals ruled the U.S. Senate can launch tax bills even though the Constitution requires that funding measures begin in the U.S. House of Representatives.

The decision, which likely will be appealed to the U.S. Supreme Court, came in a challenge to the constitutionality of Obamacare, a tax-raising measure that began in the Senate.

The judges, in an opinion written by Judge Judith Rogers, reasoned that if the aim of Obamacare is to force people to buy health insurance, the billions of dollars in tax increases are incidental and, therefore, allowable.

The Pacific Legal Foundation brought the case, alleging the House bill that was removed and replaced with Obamacare by Senate Majority Leader Harry Reid had nothing to do with raising taxes, so the ultimate change out in the U.S. Senate made the entire bill unconstitutional.

It is Article 1, Section 7 of the Constitution that requires all tax bills to start in the House.

PLF attorney Timothy Sandefur said he expects the case will end up in the Supreme Court.

“PLF’s challenge to Obamacare involves fundamental constitutional principles and protections for all taxpayers, and for everyone who is covered by the tax and regulatory burdens of Obamacare,” he said. “Americans may not be subjected to new taxes by the federal government if those taxes [don’t] start in the House, the chamber closest to the people. That’s the principle underlying our lawsuit, and it’s so basic to our constitutional framework that the case ultimately deserves a judgment by the nation’s highest court.”

He said the decision was disappointing, because it created “a new and unprecedented distinction to exempt the Obamacare tax from the Constitution’s rules for enacting taxes.”

He said the judges “adopted a vague ‘general purpose’ test for deciding which taxes have to start in the House and which do not.”

“But the Constitution makes no such distinction, and neither does Supreme Court precedent,” Sandefur said. “The precedents say that the only kinds of taxes that don’t have to originate in the House are penalties or fines. But the Supreme Court itself ruled in 2012 that Obamacare’s individual mandate is not a penalty or a fine. So the Origination Clause should therefore apply.”

He said the D.C. Circuit has ruled for the first time “that judges can decide for themselves what the ‘main object or aim’ of a

tax is, and then pick and choose whether the constitutional rules on the enactment of new taxation should apply.”

“We think that’s wrong, and that’s what we’ll be taking to the Supreme Court if necessary,” he said.

PLF said the Constitution does allow “penalties” or “fines” to begin in the Senate.

“Those aren’t subject to the Origination Clause. But the individual mandate tax doesn’t fall into that category. Why not? Because the Supreme Court said so in NFIB vs. Sebelius. It specifically held that the individual mandate tax is not a penalty – only a tax,” the team explained.

“Under the approach that the D.C. Circuit takes here, a court could say that the ‘main object or aim’ of a tax isn’t to raise money, but to fund the military, or to promote the general welfare – and therefore that the Origination Clause doesn’t apply. The ‘general purpose’ approach – which the Supreme Court has never endorsed – gives courts too much power to decide when to apply constitutional restrictions, and when not.”

WND has reported on the case, brought on behalf of Matt Sissel, a small-business owner who wants to pay medical expenses on his own and has financial, philosophical and constitutional objections to being ordered to purchase a health plan he does not need or want.

His attorneys contend the Constitution requires all tax bills in Congress to begin in the House of Representatives. They charge that Sen. Harry Reid, D-NV., manipulated the legislation that eventually gave America Obamacare by taking the bill number for an innocuous veterans housing program that had been approved by the House, pasting it on the front of thousands of Obamacare pages and voting on it.

That means, they say, that the entire law was adopted unconstitutionally and should be canceled, including its $800 billion in taxes.

The argument essentially makes the Constitution itself a silver bullet to kill Obamacare.

The first Obamacare trip to the high court was a challenge under the Commerce Clause. But the Supreme Court ruled in 2012 the law was a tax and, therefore, constitutional.

In its second decision regarding Obamacare, the Hobby Lobby case, the Supreme Court ruled that the government cannot force company owners to violate their faith by being required to fund abortion-causing drugs in employee insurance plans.

Sissel v. U.S. Department of Health & Human Services says Obamacare was “not enacted in compliance with constitutional procedures for raising taxes,” the plaintiff argues.

PLF points out Article I, Section 7, requires that legislation to raise revenue must start in the House to keep the taxing

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power close to the people.

The district court’s June 2013 ruling in the case left a stunning precedent. The court ruled that the individual mandate tax could be arbitrarily exempted from the Origination Clause requirement “on the grounds that the mandate is intended to prod people to buy health plans.”

“There is no precedent for setting aside the Constitution’s procedural requirements for new taxes merely because a tax influences conduct,” said Beard. “As the Supreme Court noted in its 2012 Obamacare ruling, every tax has a regulatory purpose. The district court’s doctrine would carve a gaping loophole in the Origination Clause – essentially repealing it through judicial exceptions.”

Sissel said: “I’m in this case to defend freedom and the Constitution. I strongly believe that I should be free – and all Americans should be free – to decide how to provide for our medical needs and not be forced to purchase a federally dictated health plan. I’m very concerned about Congress ignoring the constitutional road map for enacting taxes, because those procedures are there for a purpose – to protect our freedom.”

In June 2012, a Supreme Court majority accepted a, shall we say, creative reading of the ACA by Chief Justice John Roberts. The court held that the penalty, which the ACA repeatedly calls a penalty, is really just a tax on the activity – actually, the nonactivity – of not purchasing insurance. Theindividual mandate is not, the court held, a command butmerely the definition of a condition that can be taxed. Thetax is mild enough to be semi-voluntary; individuals are freeto choose whether or not to commit the inactivity that triggersthe tax.

The “exaction” – Roberts’s word – “looks,” he laconically said, “like a tax in many respects.” It is collected by the IRS, and the proceeds go to the Treasury for the general operations of the federal government, not to fund a particular program. This surely makes the ACA a revenue measure.

Did it, however, originate in the House? Of course not.

Will argued that the Senate has every right to amend a House bill, but regarding whether a change actually is an “amendment,” the case law establishes that the issue must be “germane to the subject matter of the [House] bill.”

Earlier, dozens of members of the U.S. House of Representatives signed on to the case, claiming the Senate didn’t have the authority to pass the bill.

They argued taxes only can originate with the House, the representatives closest to the American people.

The requirement is so important, according to the members of Congress, that the Constitution never would have been adopted without it.

According to a brief dozens of House members have filed in the case, the principle “behind the Origination Clause – sometimes phrased as ‘No Taxation Without Representation’ – was the moral justification for our War of Independence.”

“With this war for freedom and liberty in mind, the Origination Clause of our Constitution was written; and without it at the core of the ‘Great Compromise of 1787,’ the 13 original states would never have agreed to ratify the Constitution,” the brief states.

“The primary dividing issue between the delegates to the Constitutional Convention of 1787 was the question of how to resolve the method of representation in the upper chamber. The small states preferred to retain the equal representation they had enjoyed under the Articles of Confederation, while the large states wanted to shift the national legislature to a proportional representation of the American population. No disagreement threatened the success of the convention and the new Constitution more than this one. After a month of heated debate and threats of secession, the delegates finally agreed to the Great Compromise of 1787; a bicameral legislature with equal representation of states in the upper branch, and proportional representation of the nation in the lower branch. That Great Compromise was only made possible by agreement of both sides to restrict the upper branch from originating money bills.”

It continues: “The power of the purse was unquestionably reposed in the People’s House, and it has remained in that chamber throughout our history. If the Senate can introduce the largest tax increase in American history by simply peeling off the House number from a six-page unrelated bill which does not raise taxes and pasting it on the ‘Senate Health Care Bill’ and then claim with a straight face that the resulting bill originated in the House, in explicit contravention of the supreme law of the land, then the American ‘rule of law’ has become no rule at all.”

The brief was filed by attorneys representing Reps. Trent Franks, Michele Bachmann, Joe Barton, Kerry L. Bentivolio, Marsha Blackburn, Jim Bridenstine, Mo Brooks, K. Michael Conaway, Steve Chabot, Jeff Duncan, John J. Duncan, Jr., John Fleming, Bob Gibbs, Louie Gohmert, Andy Harris, Tim Huelskamp, Walter B. Jones, Jr., Steve King, Doug Lamborn, Doug LaMalfa, Bob Latta, Thomas Massie, Mark Meadows, Randy Neugebauer, Steve Pearce, Robert Pittenger, Trey Radel, David P. Roe, Todd Rokita, Matt Salmon, Mark Sanford, David Schweikert, Marlin A. Stutzman, Lee Terry, Tim Walberg, Randy K. Weber, Sr., Brad R. Wenstrup, Lynn A. Westmoreland, Rob Wittman and Ted S. Yoho.

Their argument noted that at the 1787 convention, George Mason explained why the Senate was not allowed to raise taxes.

“The Senate did not represent the people, but the states in their political character. It was improper therefore that it should tax the people … Again, the Senate is not like the H. of Representatives chosen frequently and obliged to return

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frequently among the people. They are chosen by the Sts for 6 years, will probably settle themselves at the seat of Govt. will pursue schemes for their aggrandizement – will be able by weary[ing] out the H. of Reps. and taking advantage of their impatience at the close of a long session, to extort measures for that purpose.”

U.S. senators originally were selected by state legislatures, not a direct vote of the people. The law was changed by the 17th Amendment in 1913.

A Legislative Update from Capitol Hill

House Committee Recommends Big Changes for the IRS

A new report from the House Committee on Oversight and Government Reform is recommending drastic changes for the Internal Revenue Service as part of its ongoing investigation into targeting of groups for political reasons.

The report, Making Sure Targeting Never Happens: Getting Politics Out of the IRS and Other Solutions, says that the IRS is a “broken agency” and that it is “no longer a neutral administrator of federal tax law.” The report notes that the Committee’s investigation is not yet complete but that it has reviewed roughly 800,000 pages of documents and interviewed over 35 IRS employees in its ongoing investigation.

The report suggests numerous reforms for the IRS. Below are some of its proposed reforms and explanations for proposing them. The full report is included at the end of this post.

Make the IRS a multi-member, bipartisan commission

The IRS needs internal controls – such as the checks and balances generated by a multi-member, bipartisan structure – to help thwart future transgressions and ensure timelyawareness and response to any misconduct. Congress oughtto consider legislation to reform the structure of the IRS froman agency led by a single commissioner to a multi-member,bipartisan commission.

Remove the IRS as a regulator of political speech for social-welfare groups

Congress ought to consider legislation that removes the IRS as a regulator of the political speech by section 501(c)(4) groups by recognizing that political speech can be part of efforts to advance the social welfare. This idea would not only help to prevent politically oriented IRS misconduct from occurring in the future, but would also recognize the constitutional rights of applicants to free speech and free association.

Establish personnel reforms for dismissed federal workers

The federal workforce should work better for the American

taxpayers. Congress should consider proposals to improve accountability in the federal workforce and make the government work better for the American taxpayers. Among these proposals, Congress should examine changes to civil serve protections and pay for federal workers removed for misconduct.

Increase political activity restrictions for certain IRS employees

The Committee’s investigation has shown that the IRS has become an increasingly politicized agency. Congress should consider proposals to increase political activity restrictions for IRS Exempt Organizations Division personnel. Congress could consider including IRS Exempt Organizations employees as “further restricted” under the Hatch Act.

Implement rigorous training on the use of personal e-mail and penalties for misuse

Given the apparent frequency of federal employees using non-official e-mail accounts to conduct official business, the IRS and other federal agencies ought to develop and implement more rigorous training on the appropriate use of non-official e-mail accounts and the protection of sensitive records. In addition, Congress should consider legislation to implement penalties for federal employees who misuse non-official e-mail accounts for official government business.

Allow taxpayers, and not the IRS, to control access to their confidential taxpayer information

Congress ought to consider legislation to revise section 6103 of the Internal Revenue Code. The revision should allow the American taxpayers to control the access to their confidential taxpayer information and provide the opportunity for taxpayers to request all of their confidential taxpayer information from the agency or authorize other entities to access it. Taxpayers should also be allowed to waive, opt out, and change access to their confidential taxpayer information as they wish.

Limit the time for IRS review of a tax-exempt application

The IRS should not be able allowed to review a tax-exempt application indefinitely. Congress ought to consider legislative proposals to implement an appropriate limit – for example, 60 days – for the IRS internal evaluation of applications for tax- exemption, after which the applicant automatically receives exemption if the IRS has not made a determination.

Prohibit political and policy communications between the IRS and Executive Office of the President

The investigation demonstrates how the IRS has become increasingly close with the Executive Office of the President. Although there is a role for coordination with the Office of Tax Policy in the Treasury Department, Congress ought to consider legislative steps to prevent IRS employees from engaging in political or policy discussions directly with the White House.Remove the IRS from implementation of the Affordable Care Act

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The Affordable Care Act endowed the IRS with a tremendous responsibility over a highly partisan law. This responsibility has resulted in a close relationship between the IRS and political elements of the Administration. To return the IRS to its traditional role as an impartial administrator of the tax code, Congress ought to consider legislation to remove the IRS from the implementation and administration of the Affordable Care Act.

Senators Introduce Bill to Prevent Tax Refund Theft

Leaders of the Senate Finance Committee have introduced bipartisan legislation to improve protection for taxpayers against fraudulent tax refund claims made with stolen identities.

Sen. Orrin Hatch, R-Utah, ranking member of the Senate Finance Committee, and Ron Wyden, D-Ore., who chairs the Senate Finance Committee, introduced the Tax Refund Theft Prevention Act of 2014, S. 2736

The bill includes new assistance for taxpayers who have been victims of identity theft and requires the Internal Revenue Service to establish a new security feature that individuals can use to protect their tax return filings.

“Tax refund fraud is a one-two punch for taxpaying individuals,” Hatch said in a statement. “Millions of taxpayers’ identities are compromised, and all taxpayers have their tax dollars wasted. Our bill aims to address such fraud by enhancing the IRS’s capabilities in detecting fraud and by giving victims the assistance and safeguards they need to repair the damage done by tax theft criminals. In order to further deter this crime, we make tax refund fraud a specific category of a felony offense and enhance security features for filers. Hard-working American families deserve a government that protects both their tax dollars and their sensitive taxpayer information. I am pleased Chairman Wyden has joined me in this advancing this effort.”

Orrin Hatch

“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said. “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving

the American tax system. This bill offers a comprehensive, commonsense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized. Senator Hatch and I remain committed to protecting the integrity of our tax system.”

Under the bill, businesses would be required to report both employee compensation and certain non-employee compensation to the government earlier in tax season. The change would improve the IRS’s ability to identify and prevent fraudulent refund claims.

Paid tax preparers would be required to file individual income tax returns and most information returns electronically under the proposed legislation. In addition, the electronic filing requirement for preparers who file over 250 tax returns would be scaled back to 20 returns, over a three-year period, to improve the IRS’s ability to identify and prevent fraudulent refund claims.

The existing access that the Treasury Department has to the National Directory of New Hires database would be expanded for the purpose of identifying and preventing fraudulent tax filings and refund claims.

Ron Wyden

Victims of tax refund theft would be assigned a single contact person within the IRS for help with correcting their tax records and receiving their tax refunds.

Under the bill, the list of aggravated identity theft crimes that are classified as felonies would be expanded to include tax refund theft. Tax preparers would also face significant new penalties if they inappropriately disclosed taxpayer information in connection with an identity theft crime.

Individual taxpayers would be able to add password security to their tax filings under the legislation. If a tax return filer elected to add this security measure, then a valid tax return could not be filed without also using the correct password.

Under the bill, due diligence requirements imposed on tax preparers with respect to the Earned Income Tax Credit would be expanded to include a requirement that the preparer verify the tax filer’s identity. The senators’ office noted that many fraudulent returns falsely claim the EITC in order to generate a tax refund.

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Under the proposed legislation, he IRS would be prohibited, with limited exceptions, from issuing multiple tax refunds to the same account or address. Annual tax statements received by employees for wages earned would be required to use a truncated Social Security number in order to protect the number from identity theft.

Education Credits

The House approved legislation to consolidate four different tax incentives for higher education into a single tax credit.

The bill, known as the Student and Family Tax Simplification Act, would consolidate the Hope Credit, the American Opportunity Tax Credit, the Lifetime Learning Credit, and the tuition deduction into a single, expanded American Opportunity Tax Credit.

The new AOTC, which would be permanent and partially refundable, would provide a 100 percent tax credit for the first $2,000 of eligible higher education expenses and a 25-percent tax credit for the next $2,000 of such expenses(for a maximum credit of $2,500).

The first $1,500 of the credit would be refundable, meaning that families could receive the benefit regardless of whether they have federal income tax liability. The credit could be used to offset expenses for tuition, fees and course materials.

The credit would be available for up to four years of post-secondary education at qualifying four-year universities, community colleges, and trade and vocational schools. It would begin to phase out for families with incomes between $86,000 and $126,000 (half those amounts for single individuals) to ensure that the credit provides greater benefit and value to low- and middle-income families.

However:

“In simplifying education provisions within the tax code, this bill leaves behind numerous undergraduate students, graduate students and lifetime learners,” said Levin in a speech on the House floor. “It replaces the Hope Scholarship Credit, it repeals both the Lifetime Learning Credit and the now expired deduction for qualified tuition expenses. And it limits the overall deduction for the first four years of schooling. It harms students across the board.”

He argued that undergraduates who take longer than four years to complete their degrees would be impacted, a change that loses sight of the fact that the median length of time it takes undergrads to get their degrees is more than four years. Adult learners would face higher costs.

“Three in four students are adult learners, who tend to take much longer to complete their degrees because they work full-time, have dependents, serve in the military, or have some combination of the foregoing, and take longer to complete their degree. Low-income and middle-income graduate students would lose out,” he said. “In 2013, the Lifetime Learning Credit,

which this bill eliminates, served nearly two million students with incomes at or below $75,000, including 1 million with an income of $40,000 or less.”

Congress Considers Regulating Tax Preparers

In the first few months of each year, Americans turn for vital help to a group of 350,000 professionals whose work goes virtually unregulated: tax preparers. Following a court decision that struck down an Internal Revenue Service (IRS) rule that would impose licensing requirements on tax preparers, Congress is considering whether to pass new licensing regulations through legislation.

Currently, the IRS requires tax preparers to obtain an identification number that their clients must submit with their tax returns. This enables the agency to identify preparers who consistently file improper returns. However, the federal government does not otherwise regulate tax preparers, such as by imposing licensing requirements.

Earlier this year, the U.S. Government Accountability Office (GAO) conducted an investigation of tax preparers and found pervasive mistakes. For example, 30% of the tax preparers advised clients to claim ineligible children for the Earned Income Tax Credit (EITC). Sixty-three percent suggested not reporting cash tips.

The IRS has not been blind to these concerns, which have long preceded the GAO’s recent report. In 2011, it issued a rule creating a licensing system for tax preparers, with exams, fees, and continuing education requirements. The IRS claimed authority to promulgate the rule under a 130-year old statute that authorizes the federal government to “regulate the practice of representatives of persons before the Department of Treasury.”

In addition to concerns about fraud and incompetence, the IRS also justified its rule by citing the need for uniformity. Four states had general tax preparer regulation, while the others did not. Admittedly, professional associations have strict regulations on attorneys and accountants who often help their clients file returns, but many other tax preparers practice outside those professions.

In 2012, the libertarian Institute for Justice challenged the IRS rule in court. It argued that the IRS lacked authority to issue its

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rule because the underlying statute was meant only to cover those who would appear before the IRS in audit proceedings. Most tax preparers merely assist taxpayers and never appear before the IRS.

In 2013, a federal district judge agreed with the Institute and invalidated the IRS regulation, and earlier this year, the D.C. Court of Appeals upheld the lower court’s decision. In aunanimous opinion by Judge Brett Kavanaugh, the appealscourt held that the IRS rule exceeded the agency’s statutoryauthority. It considered the word “representative” to involvean agency relationship, as did some other IRS regulations.The court also found that the phrase “practice…before theDepartment of Treasury” implied that a representative neededto make arguments or engage in advocacy on behalf of aclient’s case.

In the wake of this appellate court decision, President Obama included language in his proposed 2015 budget legislation that would grant the IRS authority to regulate all tax preparers and increase penalties on preparers who willfully or recklessly misrepresent tax returns.

The Senate Finance Committee held a hearing on tax preparers earlier this spring. IRS Commissioner John Koskinen testified that failure to adopt legislation would result in “increased collection costs, reduced revenues, the burden placed on taxpayers by the submission of incorrect returns on their behalf, and a reduction in taxpayers’ confidence in the integrity of the tax system.”

Committee Chair Ron Wyden (D-OR) called the D.C. Circuit’s decision “baffling” and supported national legislation. He pointed to a GAO study, which found that taxpayers in Oregon, the state with the strictest tax preparer licensing laws, were 72% more likely to file an error-free return than the national average.

However, Dan Alban of the Institute for Justice pointed out that an IRS study found California, which also has tax preparer licensing laws, has the third highest error rate in the nation. (The GAO’s most recent report acknowledges this, but argues that Oregon’s laws are stricter.)

Alban contended that tax preparer regulation is anti-competitive because “licensing burdens usually fall hardest on the little guys.” He pointed out that large tax preparers like H&R Block support increased regulations. He also quoted a Wall Street Journal editorial that argued that “big tax preparers…are only too happy to see the feds swoop in to put their mom-and pop seasonal competitors out of business.” He said that the IRS could respond to concerns about fraud by increasing criminal enforcement against the “bad apples” rather than enacting new regulations.

Senator Orin Hatch (R-UT), the ranking Republican on the committee, was more equivocal. He acknowledged the problem of “incompetent and unethical” tax preparers, but argued that they were a symptom of the complex and burdensome tax code. Instead of regulation, he advocated for a “fair and simple

tax system that dramatically reduces [taxpayer] dependence on paid return preparers.” However, absent tax reform, he was open to “different ideas” to “minimize the damage” of bad tax preparers.

In an editorial arguing in favor of regulation, the New York Times suggested earlier this year that Republicans concerned with tax-related fraud might join with Democrats on this issue.However, the House Ways and Means Chair Dave Camp (R-MI) reportedly is focused solely on comprehensive tax reform and the IRS’s alleged targeting of conservative non-profits.Charles Boustany (R-LA), a member of the House committee, has stated that, while he broadly supports the idea of the IRS regulating tax preparers, he doubts the House would pass any such legislation this year.

Don, the Estate and Trust Guy

“Make a ‘Portability’ Election for Your Decedent Spouse”

Every U.S. citizen or resident has an “applicable exclusion” (5.34 million for those dying in 2014) from federal estate tax. Where a spouse dies leaving his or her entire estate to their surviving spouse, none of that exclusion is used and can be passed to the surviving spouse to be added to their exclusion upon their death by filing an estate tax return (Form 706) for the decedent spouse.

If you learn of a client or the spouse of a client passing, be sure to suggest the filing of the return even if one is not otherwise required.

Editor’s Note: Welcome to our latest addition to Taxing Times - Ask Don, the Estate and Trust Guy. In response to yoursurvey requests, Don Williamson will have a monthly columnaddressing common issues of estates and trusts. Directall questions to Beanna@ncpefellowship.com and Don willaddress those appropriate for the membership. Welcome,Don!

People in the Tax News

Former IRS Employee Arrested in Identity Theft Ring

A former Internal Revenue Service employee was arrested and charged with participating in an identity theft conspiracy that used information stolen from the files of other IRS employees.

The former IRS employee Viririana Hernandez, 30, was arrested at her mother’s home in Parlier, Calif., and charged with identity theft conspiracy, according to U.S. Attorney

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Benjamin B. Wagner’s office.

Her co-defendants Roberto Martinez, 33, and Lilliana Gonzalez, 32, both of Fresno, were also arrested at their residence. All three defendants were arraigned and entered pleas of not guilty. Martinez was released from custody with electronic monitoring. Hernandez and Gonzalez remain in custody and had a detention hearing. Arraignment for a fourth defendant, Daniel Miranda, 25, has not yet been scheduled.

On July 18, 2014, a federal grand jury in Fresno returned a 23-count indictment, charging the defendants with conspiracy,bank and wire fraud, and aggravated identity theft. Mirandawas also charged with mail fraud.

According to the indictment, from June 2012 to January 2014, the four conspirators obtained personal information from victims through various methods. Hernandez worked for the IRS since 2006 and had access to the personal information of IRS workers. Several of the victims are current or former IRS workers.

Without the victims’ permission, they opened credit card accounts in the victims’ names or added themselves as “authorized users” of the victims’ existing accounts. The conspirators then used the accounts to buy goods and services at locations throughout the Fresno area, as well as in Modesto and Riverside County. In total, the four conspirators allegedly misused the personal information of approximately 160 victims and attempted fraudulent credit card charges of more than $1.2 million.

The case is the product of an investigation by the U.S. Postal Inspection Service, the Treasury Inspector General for Tax Administration, and the Fresno Police Department. Assistant United States Attorney Michael G. Tierney is prosecuting the case.

“Identity theft is a nationwide crisis that places a heavy burden on the victim and creates chaos in the victims’ lives,” said Treasury Inspector General for Tax Administration San Francisco Field Division special agent-in-charge Rod Ammari in a statement. “When an IRS employee is involved in stealing information through their employment at the IRS and facilitating identity theft rings, it will not be tolerated and the Treasury Inspector General for Tax Administration will use all its power and resources to ensure these criminals are brought to justice.”

If the defendants are convicted, they each face up to 30 years in prison and a $250,000 fine.

IRS Tells Judge It Couldn’t Save Data on Lois Lerner’s Computer

The Internal Revenue Service told a judge its technicians made repeated futile efforts to save data on a malfunctioning computer hard drive used by Lois Lerner, the former official at the center of a dispute between Congress and the Obama administration over scrutiny of Tea Party groups.

In a series of sworn statements submitted by the IRS in its effort to fend off a lawsuit by the activist group Judicial Watch, government technicians described the step-by-step processes they followed to try to recover the data.

The IRS in June told a congressional committee investigating the agency’s review of Tea Party groups seeking nonprofit status that the hard drive crash on Lerner’s computer prevented it from obtaining much of her e-mail from 2009 to 2011.

Judicial Watch sued the IRS in October under the Freedom of Information Act for Lerner’s e-mail and other communications concerning the processing of applications for tax-exempt status. The litigation and congressional investigation were triggered by Lerner’s statement in May 2013 that the IRS singled out for extra scrutiny the applications of groups with “tea party” or “patriot” in their name.

Anti-tax Tea Party groups, some of which included the word “patriot” in their name, formed shortly after President Barack Obama, a Democrat, took office in January 2009 and helped fuel gains by Republicans in the 2010 elections.

IRS filing didn’t supply information requested by U.S. District Judge Emmet Sullivan, who is overseeing the case, according to Tom Fitton, president of Judicial Watch.

The filing “seems to treat as a joke Judge Sullivan’s order requiring the IRS to produce details about Lois Lerner’s ‘lost e-mails’ and any efforts to retrieve and produce them,” Fittonsaid in a statement.

Sullivan on July 10 ordered the IRS to “explain the facts and circumstances surrounding the crash” of Lerner’s hard drive in 2011, including information about efforts to repair the device and recover data from it.

Lerner, who retired last year, oversaw IRS employees who determined whether groups seeking nonprofit status were too political to qualify for it. Interest in her e-mail increased after she declined

Robert Redford Sues New York Over $1.6 Million Sundance Tax Cloud

Robert Redford has sued New York State over a personal tax bill that goes back to 2005. Generally regarded as Hollywood royalty, the Sundance Film Festival founder, celebrated actor, director, and producer is generally considered the godfather of indie films. He has a Patrician air, a golden touch, and liberal values and environmental chutzpah many people admire. He was named a “Hero of the Environment” by Time ¬magazine.

Yet this time he has thrown his weight—and his lawyers—behind something that just involves dollars and cents, albeit on an arguably Constitutional scale. Mr. Redford filed suit against the State of New York over his $1.6 million tax bill. The disputed bill is almost half interest: $845,066 in unpaid taxes and $727,404 in interest, for a total of $1,568,470..

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It’s no wonder the interest adds up, since it goes all the way back to 2005. That was the year Mr. Redford sold a piece of his ownership stake in the Sundance Channel. Mr. Redford paid taxes to his home state of Utah, he notes, but New York now says he owes taxes there too.

Understandably, the lawsuit claims that he should not be subject to double taxation. His entity operated from Utah, he claims, with no property, payroll or receipts in New York. Now known as Sundance TV, the channel was named after the Sundance Film Festival Mr. Redford founded in Utah.

He didn’t even know about the bill until recently, and that too was a shocker. Mr. Redford was the sole owner of a closely held company called Sundance TV in 2005. Through that entity, Mr. Redford owned an 85% stake in Sundance Television Limited. In 2005, Sundance Television Limited sold “a portion” of its 20% stake in the Sundance Channel.

The legal question is whether an owner like Mr. Redford who is resident in another state can somehow be taxed by New York. True, the Sundance Channel is based in New York. However, neither Sundance TV nor Sundance Television Limited had an office, property or employees in New York

One wonders if the tax mess could somehow expand to 2008. That was the year in which Mr. Redford and others (his partners at NBCUniversal and CBS) sold the rest of the Sundance Channel to Cablevision’s Rainbow Media unit. It later was spun off and became a part of AMC Networks. See Hollywood Reporter.

As for taxes on his piece of the 2008 transaction, Mr. Redford indicates that he reported the gain. In fact, he paid tax on it in Utah, just the same way as for 2005. It wasn’t New York income, he asserts. Mr. Redford notes that New York tax officials even audited the 2008 transaction, agreeing that it was correctly reported.

Mr. Redford’s lawyers have asked the New York court for a ruling on whether it is constitutional to tax him—a nonresident of New York—on gain from selling a stake in a limited liability company. The suit wants the errant tax bill thrown out. Plus, the suit asks the court to award him with attorneys fees. Anyone who has faced tax disputes–perhaps especially the double pain of two different jurisdictions claiming a share of the same money, is likely to have a little sympathy.

Tax Relief Company Agrees to Turn over $16 Million to Bilked Consumers

The Federal Trade Commission said it is mailing more than $16 million in refund checks to 18,571 consumers who had paid money to American Tax Relief, a company that allegedly bilked financially distressed consumers by falsely claiming it could reduce their tax debts.

Under a settlement that the FTC reached last year, American Tax Relief turned over millions of dollars in assets the court had frozen, including bank accounts, jewelry and a Ferrari. The parents of one of the defendants also turned over bank accounts, jewelry, a Beverly Hills residence and a Los Angeles condominium.

The FTC said last week that affected consumers would receive, on average, 16 percent of the amount they lost. Those who receive checks from the FTC’s refund administrator should cash them within 60 days of the mailing date. The FTC never requires consumers to pay money or to provide information before refund checks can be cashed

First Circuit Affirms Deduction of Fraud Penalty Settlement By Government Contractor

The First Circuit, in a case of first impression and a split with the Ninth Circuit, has held that in determining the tax treatment of an FCA (False Claims Act) civil settlement, a court may consider factors beyond the mere presence or absence of a tax characterization agreement between the government and the settling party.

The case, Fresenius Medical Care Holdings, Inc. v. United States, involved the tax treatment of roughly $127 million paid to the government in partial settlement of what the court characterized as “a kaleidoscopic array of claims.” Fresenius is a major operator of dialysis centers in the U.S. and around the world. Between 1993 and 1997, a series of civil actions were brought against Fresenius by whistleblowers, resulting in investigations into Fresenius’s dealings with various federally funded health-care programs, and a complex of criminal plea and civil settlement agreements by Fresenius with the government.

The district court concluded that where the parties had abstained from any tax characterization, the critical consideration in determining deductibility was the extent to which the disputed payment was compensatory as opposed to punitive. Generally, no business expense deduction is allowed

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for fines paid for the violation of any law, but compensatory damages may be deductible since they are not considered to fines.

The First Circuit found that at trial, the court’s jury instructions followed this conclusion and directed the jury’s focus to the economic realities of the situation. According to the First Circuit, “The jury split the baby and found that a large chunk of the money ($95 million) was deductible. “

The government relied on the Ninth Circuit’s Talley decision, arguing that the FCA settlement context is special and that economic reality is irrelevant, insisting that the only pertinent inquiry is one that seeks to determine whether a tax characterization agreement exists between the government and the settling party. The First Circuit disagreed.

“We cannot accept the government’s rationale,” the court stated. “A rule that requires a tax characterization agreement as a precondition to deductibility focuses too single-mindedly on the parties’ manifested intent in determining the tax treatment of a particular payment. Such an exclusive focus would give the government a whip hand of unprecedented ferocity: it could always defeat deductibility by the simple expedient of refusing to agree – no matter how arbitrarily -- to the tax characterization of a payment.”

Vanessa Williams Faces IRS Tax Lien

Vanessa Williams, the former Miss America turned actress, has a new title. She’s a major federal tax debtor, according to the Internal Revenue Service.

The IRS filed a nearly $370,000 tax lien against Williams, who starred in the popular television programs “Ugly Betty” and “Desperate Housewives.”

The filing, first reported by The Smoking Gun website, lists taxes that the IRS contends Williams didn’t pay for the 2011 tax year. The document, filed in New York where Williams is a resident, notes that the agency had filed a tax assessment against the actress in November 2012.

After not getting the money, the IRS filed the lien for $369,249.89.

Williams joins a long list of celebrities who have had tax troubles. In most cases, the stars -- or more accurately, their people -- clear up the tax mess.

Ex-IRS Official Lois Lerner Called Conservatives ‘Crazies’

A former IRS official at the heart of the agency’s tea party controversy called conservative Republicans “crazies” and more in emails.

Lois Lerner headed the IRS division that handles applications for tax-exempt status. In a series of emails with a colleague in November 2012, Lerner made two disparaging remarks about members of the GOP, including one remark that was profane.

Rep. Dave Camp, who chairs the House Ways and Means Committee, released the emails Wednesday as part of his committee’s investigation. The Michigan Republican says the emails show Lerner’s “disgust with conservatives.”

In one email, Lerner called members of the GOP crazies. In the other, she called them “assholes.” The committee redacted the wording to “_holes” in the material it released publicly but a committee spokeswoman confirmed to the AP that the email said “assholes.”

Congress and the Justice Department are investigating whether the IRS improperly scrutinized applications for tax-exempt status from conservative groups.

Camp sent copies of the emails to the Justice Department, saying they provide further proof that Lerner willfully targeted conservatives.

Lerner has since retired from the agency. Her lawyer did not immediately respond to a request for comment.

Lerner has emerged as a central figure in several congressional investigations into the IRS’ handling of applications for tax-exempt status by tea party and other conservative groups. Twice Lerner refused to answer questions at congressional hearings, invoking her constitutional right against self-

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incrimination.

In June, the IRS told Congress that an untold number of Lerner’s emails were lost when her computer hard drive crashed in 2011.

In the newly released emails, Lerner was apparently traveling in Great Britain when she uses her Blackberry to send a series of emails to a colleague at the IRS. Camp said Lerner was using her government email account.

Lerner tells her colleague that she overheard some women say America was bankrupt and “going down the tubes.”

“Well, you should hear the whacko wing of the GOP,” replied her colleague, whose name is blacked out. “The US is through; too many foreigners sucking the teat; time to hunker down, buy ammo and food, and prepare for the end. The right wing radio shows are scary to listen to.”

Lerner replies: “Great. Maybe we are through if there are that many assholes.”

Her colleague replies: “And I’m talking about the hosts of the shows. The callers are rabid.”

Lerner: “So we don’t need to worry about alien terrorists. It’s our own crazies that will take us down.”

Man With Offshore Account Pleads Guilty To Hiding $1.1 Million From IRS

An 83-year-old Florida man pleaded guilty to hiding at least $1.1 million from the IRS in secret Swiss and Israeli bank accounts for over a quarter century.

Bernard Kramer held the secret accounts from 1987 to about 2012. He used the code phrase “Hot Lips” when referring to them in conversations with Swiss bankers in Zurich according to a criminal filing in Manhattan federal court.

Mr. Kramer pleaded guilty to one count of conspiracy and one count of tax perjury. As a condition of his plea agreement, Mr. Kramer agreed to cooperate with government investigators and to pay a civil penalty in the amount of $588,042 along with past due taxes. He potentially faces a maximum eight-year prison term — five years for conspiracy and three years for tax perjury — when he appears in court for sentencing on February 6, 2015.

“Mr. Kramer acknowledged responsibility for his conduct. He looks forward to putting the matter behind him,” said defense attorney Brian Ketcham, of Kostelanetz & Fink in New York City.

Mr. Kramer is the latest casualty in the U.S. government’s efforts to enforce compliance of the foreign asset reporting requirements among its citizens and residents. In doing so, the government has taken a heavy-handed approach – prosecuting those who have willfully hidden their offshore

accounts in order to evade taxes. Charges against Mr. Kramer were brought as part of an ongoing, multi-year crackdown on suspected offshore tax evasion by the Department of Justice and the IRS.

According to the Manhattan court filing, Mr. Kramer secretly received disbursements from the unidentified Swiss bank by requesting checks for amounts less than $10,000 — the threshold amount that triggers banks to file a Currency Transaction Report, a FinCEN form that reports transactions to government regulators.

Mr. Kramer maintained the secret Swiss account after it became publicly known in 2008 that Swiss banking giant UBS was being investigated by U.S. authorities for allegedly helping American account owners evade federal taxes.

The following year, UBS agreed to a $780 million deferred-prosecution deal with federal prosecutors to settle criminal charges that it sent bankers posing as tourists into the U.S. to help clients evade taxes. In the first major crack in historic Swiss bank secrecy, UBS also agreed to turn over the financial information of nearly 4,500 U.S. clients whose accounts once held an estimated $18 billion.

With the assistance of Swiss bankers, Mr. Kramer opened a new secret account for his funds at an Israeli bank headquartered in Ramat Gan. The bank was not identified in court filings.

U.S. law requires citizens and residents to file annual IRS reports disclosing domestic and offshore income. A separate requirement mandates disclosure of any foreign account with an aggregate value of more than $10,000 in any calendar year.

According to court filings, Mr. Kramer filed false tax returns with the IRS from approximately 1987 through 2012.

Inmates Charged in Tax Fraud Scheme

Federal law enforcement officers just conducted what are probably two of the easiest arrests they will ever make. The two men who stand accused of receiving more than $400,000 from fraudulently filed tax returns were already serving time in a Minnesota state prison.

Tanka James Tetzlaff, 39, and Tony Terrell Robinson, 30, each

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face one count of conspiracy to defraud the United States and 10 counts of false claims against the United States, according to a grand jury indictment that the Department of Justice has unsealed.

Agents from the Internal Revenue Service’s Criminal Investigation Division allege that from October 2009 through approximately September 2010, Tetzlaff and Robinson conspired to prepare and file false federal income tax returns and fraudulently claim tax refunds while they were inmates at the Minnesota prison in Faribault, about 50 miles south of Minneapolis.

As part of their scheme, the defendants allegedly recruited other state prisoners to file false tax returns using their names and Social Security numbers, according to a Department of Justice statement about the charges. The defendants and three other co-conspirators who weren’t in jail then allegedly filed the tax returns using false wage and federal income tax withholding information.

Tax refunds based on the fake filings were sent out by the IRS as checks, directly deposited into bank accounts or loaded onto debit cards, with alleged tax fraud scheme ringleaders Tetzlaff and Robinson getting a cut of the profits, according to the indictment.

All three of the alleged conspirators who weren’t behind bars pleaded guilty earlier this year to conspiracy charges, according to the Justice Department. One was sentenced earlier this month. The other two are awaiting sentencing.

I know. You’re shaking your head at how inmates could conduct tax fraud. Sadly, it’s not a new phenomenon.

In a December 2012 report, the Treasury Inspector General for Tax Administration found that the number of fraudulent federal tax returns filed by prisoners increased from more than 18,000 tax returns in 2004 to more than 91,000 in 2010.The fake refunds claimed on those false filings also grew over that period, from $68 million in 2004 to $757 million just six years later.

“Refund fraud committed by prisoners remains a significant problem for tax administration,” said the TIGTA report back then. No kidding.

Part of the problem then, according to TIGTA, was an inaccurate list of prisoners maintained by the IRS. The agency’s file contained incomplete inmate records, noted the report, and not all prison facilities provided information on their inmates.

Since then a