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How to make Trump’s tax returns public? The GOP may have cleared a path

By Joe Light


If Democrats now in charge of the House Ways and Means Committee ever get their hands on President Donald Trump’s tax returns, they could thank their Republican predecessors for providing cover to make the documents public.


In 2014, the GOP-controlled panel voted to expose taxpayer information surrounding the IRS’s admission that it improperly delayed some Tea Party groups’ applications for tax-exempt status. Committee Chairman Dave Camp had said the release was needed to inform the Justice Department about potential crimes and notify the public about IRS wrongdoing.


Legal scholars have said much of the exposed information didn’t relate to the purported malfeasance. Lois Lerner, the IRS director of exempt organizations, was suspended and later retired, but wasn’t charged with any crimes.


House Ways and Means Committee Chairman Richard Neal, D-MassachusettsAndrew Harrer/Bloomberg

The episode, though under different circumstances, could be used by Democrats as a precedent to make some of Trump’s tax information public, if Democratic Ways and Means Chairman Richard Neal ever succeeds in obtaining the returns, said Christopher Rizek, an attorney with Caplin & Drysdale in Washington.


The Lerner episode should be a concern to Republicans “if they don’t want the returns to be made public,” Rizek said. He said that if Trump tries to fight a release of his tax returns, his attorneys will likely argue that Camp’s release of the information in 2014 was itself illegal.


The Trump administration, the president’s personal attorneys and Neal’s committee are locked in a battle over Neal’s request for six years of Trump’s personal and business returns. Democrats are investigating a number of matters related to Trump’s businesses before the 2016 election and whether he has paid all the taxes he owes.


Auditing the President

Mindful that some scholars believe federal law requires a legislative purpose for seeking a taxpayer’s returns, Neal told the IRS and the Treasury Department that he wants to ensure the IRS is following its policy of annually auditing the president. The Treasury Department and Trump’s lawyer, William Consovoy, say that reason is merely a pretext for a political attack.


In a letter to IRS Commissioner Charles Rettig, Neal cited the tax code’s requirement that the Treasury secretary “shall furnish” the returns of any taxpayer upon request of the leaders of the Ways and Means or Senate Finance committees, as well as the Joint Committee on Taxation.


Treasury Secretary Steven Mnuchin has so far refused and is seeking a Justice Department opinion. Republican lawmakers say Neal’s move is unprecedented.


“Americans should be able to trust that the federal government or some unelected bureaucrat in Washington is not going to publicly release their tax returns without the taxpayer’s consent,” Ways and Means committee member Mike Kelly, a Pennsylvania Republican, said at an Oversight subcommittee hearing in February before Neal’s official request.


But in 2014, Camp used the same power to investigate claims that the IRS was selectively targeting conservative advocacy groups. He and other Republicans believed the IRS deliberately slow-walked the approval of tax-exempt status for conservative organizations such as the Tea Party. The committee gathered documents including the private taxpayer information of liberal and conservative groups to show the IRS paid greater scrutiny to conservatives.


‘We Have the Authority’

After going through the documents, Camp said he found evidence that Lerner broke the law. At a closed meeting, the committee voted to send a letter referring the matter to the Justice Department while making the letter and the accompanying evidence public, which Camp said was under its power in section 6013 of the tax code. The documents included taxpayer information about the groups the IRS was said to target and also about unrelated taxpayers.


“Look, 6103 provides for this," Camp said, according to a transcript of the closed session that was later made public. "The statute provides that when the committee, in its oversight role, finds egregious information, we have the authority to release confidential taxpayer information.”


Given the nature of what his committee had discovered, “It is important that we try to find a way to move this into the public sphere,” Camp said.


Over Democrats’ objections, the committee voted to make public the letter and evidence, which included private information of 51 taxpayers.


The Justice Department notified Congress in 2015 that it wouldn’t charge Lerner or others involved in the matter.


“That whole episode turns out in retrospect to be pretty important,” said University of Virginia law professor George Yin, who has studied the issue. Yin said he believes Camp didn’t provide a legitimate legislative purpose to make the taxpayer information public and that the committee members who voted in favor of releasing it likely broke the law.


To comply with the law, Neal would need to have such a purpose before making Trump’s information public, Yin said.


Though Yin said Neal should avoid Camp’s mistakes, he said the Lerner episode shows that some Republicans’ concerns that Neal’s request “opens a can of worms” are unfounded, because in Yin’s view, the authority was already misused.


A spokeswoman for PricewaterhouseCoopers, where Camp now works, said in an email that Camp wasn’t available to comment.


Neal has said he doesn’t plan to make Trump’s tax information public. However, many Democrats believe that once the committee begins to examine the returns, they’ll find evidence of potential lawbreaking that warrants disclosure.




Appeals court finds taxpayer failed to mail amended return in time despite mailbox rule

By Roger Russell


A federal appeals court reversed a district court’s judgment, holding that taxpayers could not rely on the common law mailbox rule to show that an amended return had been timely filed in order to claim a tax refund.

The Ninth Circuit Court of Appeals reversed the lower court decision in the case, Baldwin v. U.S., CA-9, on Tuesday. In the case, a married couple, Howard and Karen Baldwin, filed an action to obtain a refund of taxes they paid for the 2005 tax year. The district court decided in their favor, awarding them approximately $167,000 plus $25,000 in litigation costs. But on appeal, the Ninth Circuit overruled the decision, holding that the district court lacked jurisdiction to hear the case.


As a prerequisite to filing a refund claim, the court noted that a taxpayer has to file a timely amended return claiming the refund. The common law rule allows proof of proper mailing to constitute timely delivery if it was mailed within the time it would ordinarily take to arrive. However, section 7502 of the tax code requires actual delivery of a document to the Internal Revenue Service with a postmark on or prior to the deadline. The IRS never received the amended 2005 return postmarked by the Oct. 15, 2011 deadline. The IRS eventually received an amended 2005 return in July 2013, but it was postmarked after the statutory deadline had passed. As a result, the IRS denied the Baldwins’ refund claim as untimely.


The appeals court observed that the underlying tax dispute, although not relevant to its decision, originated in the Baldwins’ attempt to carry back a loss from their movie production business in 2007 to 2005 to offset their 2005 tax liability.


The court found Reg. section 301.7502-1(e)(2), which interprets Code section 7502, is valid and applies in this case. Therefore, because timely filing is a mandatory requirement for maintaining tax refund suits, it reversed.the judgment of the district court.




Big tech’s big tax ruse: Industry splurges on buybacks

By Nico Grant and Ian King


Some of the largest U.S. technology companies pushed for a corporate tax overhaul in 2017 by suggesting they would go on hiring sprees and boost the economy. Just over a year after getting what they wanted, data show these firms gave most of their huge tax savings to investors.


The top 10 U.S. tech companies spent more than $169 billion purchasing their shares in 2018, a 55 percent jump from the year before the tax changes, according to data compiled by Bloomberg. The industry as a whole authorized the greatest number of share buybacks ever recorded, totaling $387 billion, according to TrimTabs Investment Research. That’s more than triple the amount in 2017.


Spending on research and development climbed slightly. Capital expenditures rose because Alphabet Inc. and Facebook Inc. almost doubled spending in that category. Apple Inc. and its partners have yet to bring manufacturing back to the U.S., as President Donald Trump had hoped. And there was no surge in tech hiring, according to data compiled by Bloomberg.


 “The companies making these hiring promises don’t have any signed agreement with any government on any level,’’ said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, a think tank that has criticized the new law. “They’re just promises. They’re going to be pretty loose and unenforceable, and they want them to be that way.’’


Buying back stock improves a company’s earnings per share and increases the value of the holdings of shareholders, including insiders. But stock repurchases aren’t so great for the economy when compared with other potential uses of that money, including hiring more workers.


The U.S. has given up hundreds of billions of dollars in corporate tax revenue for the promise of other benefits. A year in, the results don’t show much of a payoff. Buybacks are already being targeted by some politicians. U.S. Senator Chris Van Hollen, a Democrat from Maryland, threatened to introduce legislation that would make it more difficult for executives to sell stock right after their companies announce they’ll repurchase shares. Senator Marco Rubio, a Republican from Florida, said he wants to crack down on the tax benefits companies get from buybacks.


“Buybacks are one factor driving economic inequality in the U.S., as top corporate executives tend to benefit disproportionately from them,’’ David Santschi, director of liquidity research at TrimTabs, wrote in a recent report.


Trump signed the Tax Cuts and Jobs Act into law in the final days of 2017. It cut the corporate tax rate to 21 percent from 35 percent. And for profits held overseas, there was a special rate of 15.5 percent on cash and 8 percent on non-liquid assets, meant to encourage companies to bring the money back to the U.S. Once back, the theory went, the companies would invest it domestically, boosting the economy.


U.S. companies ended up saving 30 percent in tax expenses overall in 2018, according to ITEP. Tech companies were the main beneficiaries of the cash repatriation provision. Before the law, the largest overseas cash hoards among U.S. companies were held by Apple, Microsoft Corp., Cisco Systems Inc., Oracle Corp. and Alphabet.


While it’s still too soon to measure the full consequences of the law, there are signs it will miss the stated goals. Trump said it would bring $4 trillion in overseas cash back to the U.S. Corporate America repatriated $665 billion in 2018, according to the Commerce Department. Tech sector buybacks ate up more than half of that. Trump said the corporate tax cuts would spur so much economic activity that they would pay for themselves. But economic growth hasn’t improved: 2.3 percent year-over-year growth in the final quarter of 2017 versus 2.2 percent in the last three months of 2018.


Bloomberg analyzed 2018 spending by 10 of the largest U.S. tech companies: Alphabet, Inc., Apple, Cisco, Facebook, Intel Corp., International Business Machines Corp., Microsoft, Oracle and Qualcomm Inc. The study looked at six common uses of corporate cash: buybacks, dividends, hiring, acquisitions, capital expenditures and research and development. The 2018 statistics were compared with previous years.


Apple, Microsoft, Cisco, Oracle and Qualcomm have fiscal years that don’t follow calendar years. They haven’t yet disclosed employee numbers for the end of 2018. For the remaining companies, worker ranks grew 8.7 percent in 2018, versus 24 percent the year before.


These are global numbers, too. So it’s unclear how many of these jobs were created in the U.S.


Gardner, from ITEP, said tech companies may not be hiring as many workers as they are seeking because of the difficulty in finding people who have the right skills for technical jobs.


Other measures of tech job growth tell a similar story. Information technology employment in the U.S. grew 2.6 percent in 2018, versus 4.4 percent a year earlier, according to government data compiled by CompTIA, a tech industry trade group.


Research and development spending by the 10 tech companies studied by Bloomberg rose 17 percent last year — a slight uptick from the 15 percent increase in 2017. The acceleration was largely driven by Alphabet and Amazon, which have invested heavily in cloud computing.


Capital expenditures surged in 2018 as Alphabet and Facebook nearly doubled this type of spending, which includes computers for their huge data centers, and Intel boosted its capital expenditures 29 percent. A chunk of Intel’s increased spending went to re-equip a memory chip plant in China. That helped bump the companies’ overall metric to 40 percent growth, from 23 percent the year before.


After swelling in 2017, the amount of cash tech giants used for mergers and acquisitions collapsed in 2018.


Tech giants spent a combined $50 billion on dividends last year. Dividend growth was one percentage point higher than the previous year, but smaller than the acceleration in 2016.


Those 10 tech companies spent more than $169 billion on buybacks last year, up from $109 billion in 2017. The final number will rise as some of the companies with off-year fiscal calendars disclose more information about their repurchases.


In many ways, these results were foreseeable. In 2004, President George W. Bush spearheaded a corporate tax holiday in the U.S. that allowed companies to pay 5.25 percent on overseas profits if they returned the money to the U.S., rather than the standard 35 percent rate. The administration pitched it as a jobs booster, but it was followed by large share repurchases.


The 2004 law explicitly forbade companies from using the money for buybacks, but they used this new source of cash to pay other expenses and used the money they otherwise would have spent on those expenditures for share repurchases.


When Trump won the 2016 election, some tech companies saw another chance. IBM Chief Executive Officer Ginni Rometty wrote to the president-elect in late 2016, stating that his proposal to cut taxes on businesses and their repatriated overseas earnings would prompt companies to invest domestically.


“Your tax reform proposal will free up capital that companies of all sizes can reinvest in their U.S. operations, training and education programs for their employees, and research and development programs,’’ Rometty wrote.


IBM cut 16,000 workers on a global basis last year, and its R&D budget declined. Capital expenditures increased by less than $166 million, or 5 percent. Buybacks were relatively unchanged.


Oracle also lobbied hard for the tax law. The software maker has since poured cash into stock buybacks and dividends — recently giving the go-ahead to repurchase about $10 billion of shares each quarter. In previous years, the company authorized share repurchases of more than $10 billion about once a year. This helps concentrate the ownership of company co-founder Larry Ellison. It also supports the stock price and earnings per share metrics at a time when the company is struggling to grow its cloud-computing business.


“While the company is rewarding shareholders with its capital return program, we believe Oracle is significantly underinvesting in R&D compared to peers at the expense of revenue and operating income growth,” Christopher Eberle, an analyst at Nomura Instinet, wrote in a recent note.


Soon after the 2017 tax act, Apple said it would contribute $350 billion to the U.S. economy over five years, including a plan to open a new campus. The amount included some investments that were already planned. While Trump has tried to pressure the company to bring manufacturing back to the U.S., that hasn’t happened yet. Instead the iPhone maker pledged to invest $5 billion in the manufacturing efforts of its partners, up from $1 billion previously. The company also gave $2,500 restricted stock unit bonuses to each of its non-executive employees.


Apple authorized a $100 billion buyback in May, and spent $73 billion on repurchasing shares in 2018. Apple said its U.S. workforce grew by 6,000 last year, to 90,000.


Apple’s largest manufacturing partner, Foxconn, promised to create 13,000 jobs at a U.S. facility as early as 2022, winning its own huge tax breaks from Wisconsin. It has waffled on the pledge, and it’s unclear if all of those manufacturing jobs will ever materialize.


Cisco Chief Executive Officer Chuck Robbins was upfront about the tax reform. In November 2017, he said his company would “obviously” pursue stock buybacks and dividends, as well as more mergers and acquisitions and investments in innovation centers.


In the time since, Cisco decreased its capital expenditure spending, according to data compiled by Bloomberg. The networking giant’s R&D expenses rose by less than $300 million, or 4.5 percent, and the company hired 346 additional people worldwide from the end of fiscal 2017 to Dec. 31. Cisco’s buybacks, however, jumped by almost $14 billion.


Not every major tech company focused last year on returning money to shareholders. Amazon announced no buybacks and paid no dividends, and the company’s workforce grew 14 percent in 2018 versus 66 percent growth the previous year.




The Satanic Temple gets IRS nod as official house of worship

By Lynnley Browning


Many Americans regard paying taxes as a necessary evil. If they want to worship Satan, now the IRS has officially given them a tax-exempt place to do so.


The Internal Revenue Service has granted the same nonprofit status given to churches, synagogues and mosques to The Satanic Temple, an organization in Salem, Massachusetts, that calls itself America’s first devil-worshiping church. It is now protected by federal laws governing churches that operate as charities.


In a statement this week announcing the status, the group called itself “a non-theistic religious organization dedicated to Satanic practice and the promotion of Satanic rights.” Based in the town that hosted the Salem Witch Trials in the 17th century, the statement added that the group “understands the Satanic figure as a symbol of man’s inherent nature, representative of the eternal rebel, enlightened inquiry and personal freedom rather than a supernatural deity or being.”


Before the ruling, the IRS regarded the group as a “religious organization,” not as a full-fledged church with a place of worship. Churches are generally exempt from filing federal returns under the tax code.

An IRS spokesman declined to comment. Public IRS data on tax-exempt organizations reflect that The Satanic Temple has church status.


The move comes as some Republicans and Vice President Mike Pence have promised to roll back the Johnson Amendment, a 1954 Internal Revenue Code provision that prohibits tax-exempt groups, including churches, from endorsing or opposing political candidates or engaging in political activities.


That call hasn’t been included in an $11.3 billion IRS funding bill for fiscal 2020 that’s stalled over arguments about funding for President Donald Trump’s border wall with Mexico.


The Trump administration has criticized the IRS’s granting of nonprofit church status to the Church of Scientology.


Last year in Little Rock, Arkansas, The Satanic Temple placed a statue of the goat-headed creature Baphomet at the state’s capitol to voice support for the removal of a monument to the Ten Commandments.


‘Human Conscience’

Still, the Temple’s mission appears to have some mainstream religious strains. The goals are “to encourage benevolence and empathy among all people, reject tyrannical authority, advocate practical common sense and justice, and be directed by the human conscience to undertake noble pursuits guided by the individual will,” the statement said.


Lucien Greaves, a co-founder of the church, said in the statement that the group’s effort to seek tax-exempt status as a church was inspired by the efforts to repeal the Johnson Amendment.


“As ‘the religious’ are increasingly gaining ground as a privileged class, we must ensure that this privilege is available to all, and that superstition doesn’t gain exclusive rights over non-theistic religions," Greaves said. Greaves, whose phone number contains a 6-6-6-, didn’t immediately respond to requests for comment.




Tax reform had little impact on tax prep market share, says Moody’s

By Michael Cohn


The 2017 tax law had no discernible impact on consumer tax filing patterns or the market share of tax prep vendors, according to a new report from Moody’s Investors Service.


Moody’s found that approximately 56 percent of electronic filings were handled by paid providers, down just slightly from 57 percent in 2018, but it noted that’s in line with the continued secular shift toward do-it-yourself online filing services and software


Meanwhile, the respective market share of the two leading tax-preparation companies, Intuit and H&R Block, remained remarkably stable during the 2019 tax season. While TurboTax held a 30 percent share of electronic filings, a slight uptick from 29 percent in 2018, H&R Block's total share of electronic filings remained relatively flat at 16 percent. Block's store-based assisted returns business had a 9.2 percent share of electronic filings, which was down slightly from 9.5 percent last year, while the company's DIY offerings accounted for 6.8 percent of filings, up slightly from 6.5 percent in 2018. The decline in Block's assisted-returns business was smaller than Moody’s had anticipated, given the closing of underperforming store locations and the lack of a free file option offered in stores last year. This year, Block promised greater pricing transparency and, in many cases, lower prices for assisted filers. “But retaining market share does not yet indicate whether these changes will benefit Block's earnings,” said Moody’s. “The company does not report its financial results for the tax season until June.”


Moody’s looked at statistics from those two companies, as well as the Internal Revenue Service. It noted that according to the IRS, the number of tax returns filed through April 19 was virtually flat from the same period last year. Electronically filed returns accounted for 92 percent of total returns, and rose 1.4 percent, thanks to the continuing decline in paper filings.


Moody’s contends that true tax simplification would accelerate the shift of consumers away from assisted tax providers to DIY options.


“We believe that true tax simplification would accelerate the secular shift of consumers away from assisted tax providers to DIY options,” said the research report. “But despite the new tax law's increase of the standard deduction, which suggested a move toward tax simplification, the market shift to DIY software and services moved at about the same pace during the 2019 tax filing season as it did in 2018 before the new rules took effect. The vast majority of taxpayers file their taxes the same way they did in the prior tax year.”




IRS audit rate continued to decline last year

By Michael Cohn


The Internal Revenue Service’s audit rate went down again in 2018, according to data released Monday by the IRS.


The IRS Data Book for 2018 showed that compared to 2017, there were fewer audits during fiscal year 2018, from Oct. 1, 2017 to Sept. 30, 2018. The IRS audited more than 892,000 individual income tax returns during the fiscal year, down slightly from the previous year. The IRS audited 0.6 percent of all individual tax returns filed in calendar year 2017, and 0.9 percent of corporate income tax returns, not counting S corp returns. The majority of fiscal year 2018 audits, 74.8 percent, were conducted by correspondence. The other 25.2 percent were conducted in the field. Of the nearly 1 million examinations of tax returns, more than 22,000 taxpayers didn’t agree with the IRS examiner’s determination, totaling an unagreed recommended additional tax of almost $10.2 billion


On the other hand, of the nearly 1 million examinations of tax returns, almost 30,000 resulted in additional refunds to the taxpayer, totaling more than $6 billion. The IRS also examined 15,562 tax-exempt organization, employee retirement plan, government entity, tax-exempt bond, and related taxable returns in fiscal 2018.


The IRS Data Book also includes information on a wide array of other subjects, such as tax returns, refunds, examinations and appeals. It comes with charts depicting changes in IRS enforcement activities, taxpayer assistance, tax-exempt activities, legal support work and IRS budget and workforce levels compared to fiscal year 2017 and previous years. Also included this year is a section on taxpayer attitudes from a long-running opinion survey. The survey indicated that most taxpayers continued to agree it’s not at all acceptable to cheat on their income taxes. This attitude has remained within a four-point range since 2009. Most taxpayers are still satisfied with their personal interactions with the IRS. Nearly half of the taxpayers who responded to the survey last year agreed that service and enforcement are properly balanced.

IRS survey on paying taxes

“Underlying the numbers in this year’s edition of the Data Book is the hard work of IRS employees,” said IRS Commissioner Chuck Rettig in a statement. “Our employees are the backbone of this agency, delivering our mission efficiently and effectively. They work hard to help taxpayers, and the numbers outlined in the Data Book reflect their commitment.”


Over the course of the fiscal year, the IRS collected nearly $3.5 trillion, processed more than 250 million tax returns and other forms, and issued over 120 million individual income tax refunds totaling almost $395 billion.


The IRS received and processed more of every major type of form during FY 2018 than during the prior year, with the exception of estate tax returns; those filings declined slightly less than 1 percent compared to the prior year. However, filings by pass-through entities were up in fiscal year 2018. While partnerships filed nearly 5 percent more forms with the IRS in FY 2018 than in the prior year, S corporation filings were up almost 6 percent in the same time frame.


The IRS offered taxpayer assistance through over a half-billion visits to and helped more than 64.8 million taxpayers through various service channels, including correspondence, toll-free telephone helplines or at Taxpayer Assistance Centers. There were also more than 309 million inquiries to the “Where’s My Refund?” application, up 11 percent compared to the prior year.


Net revenue from delinquent collection activities rose to just over $40 billion, an increase of 1.6 percent compared to the prior year. IRS levies were up 8.3 percent compared to the previous year, but the IRS filed about 8 percent fewer liens than in fiscal 2017.




Super-rich Americans aren’t getting audited as much, new IRS data show

By Lynnley Browning


The chances of an IRS audit for people making at least $10 million a year plunged during the government’s last fiscal year, according to data released on Monday.


The audit rate for those high earners fell to 6.66 percent for fiscal year 2018, less than half of the 14.52 percent rate the year before, according to the IRS data. The government’s fiscal year runs from Oct. 1 through Sept. 30.

The most recent data spans the nearly three months before the enactment of the 2017 Republican tax-code overhaul, which cut rates for individuals and businesses. It also spans the first nine months of 2018 in which the revamp first affected tax filers.


The Internal Revenue Service tries to balance what it calls a twin policy of “service” and “enforcement.” IRS Commissioner Charles Rettig said in the report that included the recent figures that “enforcement of the tax laws is critical to ensuring fairness in our tax system.”


For both fiscal years, audit rates for those earning more than $10 million in adjusted gross income — the wealthiest income group tracked in the data — were still the highest of any income groups.

But audit rates also plunged for those earning $5 million in AGI to under $10 million, to 4.2 percent from 7.9 percent. They also dropped for those earning $1 million to $5 million in AGI — to 2.2 percent from 3.5 percent. Audit rates dropped very slightly for income groups between $100,000 and $200,000, from 0.47 percent in 2017 to 0.44 percent in 2018.


The fresh data also showed a steep drop in the tax agency’s collection of gift taxes during its last fiscal year, to $1.2 billion from $1.9 billion. Last year’s tax law doubled the value of assets that can be transferred to heirs without triggering federal estate or gift taxes — to nearly $11.2 million for an individual and $22.4 million for a married couple.


The thresholds rise slightly in 2019 and potentially more in later years, before expiring at the end of 2025, when the exemptions revert back to half of their current levels. Amounts over exemption levels are taxed at 40 percent. The IRS said last November that it won’t seek to “claw back” taxes on gifts made before 2026.


IRS audit rates by income




Wayfair and beyond: Major sales tax issues for 2019

By Daniel Hood

Last year’s Supreme Court ruling in Wayfair may be getting all the attention, but there are some other areas of sales tax and state and local tax that practitioners and their clients can’t afford to ignore, according to Avalara’s Scott Peterson. 

In an interview at Avalara Crush 19, held earlier in May in Huntington Beach, California, Peterson, who is the vice president of U.S. tax policy and government relations at the sales tax compliance solutions provider, shared both the latest details on the impact of Wayfair, and identified a number of other tax issues that will be worth paying attention to.


Lodging tax

“Anyone who’s paid attention to the rise of Airbnb, Expedia and so on won’t be surprised to hear that lodging tax is a major issue,” Peterson said. 

There are two issues with lodging taxes: who they are imposed on, and the fact that they’re extremely localized. 

“Airbnb and Expedia are in every state looking for customers, but the lodging taxes are usually imposed on the operator of the facility, not Airbnb or Expedia,” he explained. "I expect all of those to change — moving the legislative language from taxing who’s operating it, to taxing the transaction. I expect to see that kind of thought process move around the U.S., but most of the work needs to be done at the city level. Eventually, they’ll all move to a model where they tax the person who has the money — Airbnb and Expedia.”


Motor fuel tax changes

Rising use of electric cars may lower greenhouse gas emissions — but it also lowers the revenues that governments can expect from gas and other related taxes, with potentially major repercussions for funding highways and paying for road maintenance. 

Given the ongoing erosion of that tax base, “I was surprised there weren’t more big motor fuel tax changes in the past year,” Peterson said. “If electric cars keep growing, we’re going to see more and more states move the cost of highways into an upfront cost when you buy the car, or an annual fee.” 

States may impose fees on electric charging stations, he noted, but there is no easy or politically acceptable way to impose a fee or tax when people recharge their electric vehicles at home, and while Oregon is experimenting with a voluntary program where drivers’ cars are fitted with tracking devices so that the state can charge them for exactly how many miles they drove on local roads, Peterson pointed out that many Americans would be very uncomfortable with that kind of constant surveillance.


Marketplace rules

In the wake of Wayfair, many states are looking at legislation to impose sales taxes through marketplaces and marketplace facilitators like Amazon, Ebay, Etsy and the like. 

“A lot of these laws take the third-party seller out of the transaction,” Peterson said. “They simply treat the marketplace facilitator as the seller. They may include language relieving the third-party seller of tax responsibility, provided they’ve been given a certificate that the marketplace is saying they’re taking care of it.” 

States like this idea in part because it reduces the number of sellers they have to deal with from hundreds of thousands to just a handful. “They don’t want to handle thousands of applications from remote sellers,” Peterson said. “They don’t have the resources to register all these people.” 

This will be an area of tremendous complexity, both because states will have to create rules that fit the wide range of very different operating models that various marketplaces run on, and because many sellers are on multiple marketplaces. “Accountants are going to have an awful lot of clients with income and information and data coming from an awful lot of sources,” Peterson pointed out. “The cost of selling on each platform will be different — it’s a great opportunity for CPAs and accountants to add value.”


Feminine hygiene products

Sales tax in the U.S. is based on taxing tangible personal property, which has thus far included feminine hygiene products, such as tampons and pads, but people around the country are suggesting that they should actually be exempt from tax. 

“It’s kind of an equity thing, because only one of the sexes has a need for them,” Peterson said. “So there’s a movement around the United States to exempt these because they are a necessity of life. So if you live in a state that doesn’t tax groceries because they are a necessity for life, or you live in a state that doesn’t tax clothing because it’s a necessity of life — well, feminine hygiene products are a necessity of life.” 

Thus far, some states have introduced bills and debated them, only to see them killed, but he expects to see more discussion of the concept going forward.


A fresh look at tax philosophies

One common thread to the areas mentioned above, and to Wayfair, is that they are driven by changes in markets, consumer behavior, technology and the overall economy that have left state scrambling for revenue — and forcing them, in many cases, to rethink their approach to taxes. Whether it’s the specifics of what constitutes taxable tangible personal property or changes in legislative language to alter how taxes are imposed on your stay in a hotel room, or even broader shifts such as moving toward consumption taxes and away from income taxes. 

“Every state has a desire to be a manufacturing hub,” Peterson said, “but if you have a corporate income tax, you want to have the income apportioned based on something other than payroll and property. State are moving all toward sales — maybe keeping payroll and sales, but double- or triple-weighting sales. This is a perfect example of governments trying to catch up. They need to change their laws.”


The elephant in the room

Of course, the existence of all these other issues doesn’t mean that Wayfair can be ignored, as more and more states work on new legislation and rules. 

“It seems like we’re in chaos now — every week someone is doing something — but it’s exactly the same thing someone else did last week,” Peterson said. “They’re not being particularly creative — sloppy, sometimes, but not creative.” 

As an example, he noted that a number of states have adopted model sales tax legislation based on the South Dakota model that the Supreme Court based its decision on — but the language doesn’t always work from state to state. Michigan, for instance, used the South Dakota model, but the model discusses gross receipts, and Michigan doesn’t use gross receipts as part of its general tax regime.” 

And more changes are likely on the way, he predicted: “Wayfair is going to ripple — folks in state and local governments are going to look at their taxes and see what about those taxes automatically forces the payor to be someone in that jurisdiction.”




Quarterly earnings have outlived their usefulness

By Anne-Lise Dorry


Financial reporting is key to the way financial markets operate, and is essential to maintain investor trust. This is why the Securities and Exchange Commission requires the filing of quarterly financial statements by all listed companies. The timeliness with which investors have access to meaningful, reliable information is important to investors who have to make investment decisions. But is quarterly reporting really valuable enough to investors to justify the time and cost spent to compile the reports? At best, this is debatable.


Last summer, President Trump suggested that quarterly earnings reports by public companies may be too frequent, and the requirements could be changed to semiannual reporting instead of quarterly. As a result, he instructed the SEC to reconsider its current requirement and allow less frequent reporting.


The directive was the latest twist in a debate that’s been raging for some time. In 2016, as part of its disclosure effectiveness initiative, the SEC asked for public comments on the frequency of interim reporting (Concept Release No. 33-10064, Business and Financial Disclosures Required by Regulation S-K). Then, this past December, the SEC sought public comments on whether to provide flexibility in the frequency of periodic reporting (Release No. 33-10588, Request for Comment on Earnings Releases and Quarterly Reports).


The notion of quarterly earnings reports is clearly on the chopping block, so it’s time to consider the potential impact of breaking that cycle:


1. More frequent reporting emphasizes short-term financial planning and discourages long-term investments.

This argument, which is frequently trotted out by those in favor of less frequent reporting, carries a lot of weight. The share price of companies usually adjusts immediately in response to their quarterly earnings release, but it does not necessarily require a full set of financial statements being prepared and published. Additionally, some industries typically have very long business cycles. Life insurance companies, for example, underwrite long-duration contracts that can span up to 30 years. Not only may quarterly reporting in this industry not be relevant, it also encourages investor speculation.


2. Less frequent reporting increases the risk of insider trading.

The longer the time between the release of financial information, the more likely it is that some confidential information may either leak or be used for insider trading. Any significant development would still have to be the subject of an 8-K filing, which would make the information public. Coupled with shorter lead times, this significantly reduces the risk of insider trading.


3. Less frequent reporting is not to the benefit of investors.

In most cases, the more recent the financial information investors rely on, the more relevant it is. As a result, that builds investor confidence in financial markets and improves companies’ access to capital. Less frequent reporting could have the opposite effect.


4. The cost of quarterly reporting outweighs the benefits.

All CFOs know there is a cost associated with preparing financial statements, especially when they must be audited. Quarterly financial statements are only subject to auditors’ review, not a full audit, but the fact remains it still isn’t cheap. Considering how flawed some of the information is and the volatility it can create, does it provide enough benefit to investors to really justify those costs?


With all these facets considered — coupled with the fact that other countries have less frequent reporting requirements without it affecting their financial markets — it seems clear that the duration of a business cycle may be a more predictive indicator of a company’s viability than the frequency of the reporting. Regulators, companies and investors may want to focus on the relevance of the information and let the artificially created earnings season go the way of the dinosaur.




The 2019 tax season in numbers

By Daniel Hood


Questions about how many tax refunds were being issued, and in what amounts, turned early-season filing statistics into a political football — but many of the concerns raised ended up disappearing in the latest data available from the Internal Revenue Service (as of April 26, 2019).

That said, the impact of the Tax Cuts and Jobs Act on tax season is pervasive and much in evidence in many of the statistics below — just not always in the way different sides of the aisle might expect.

The overall number of tax returns received and processed by the IRS remained roughly even with 2018.




This year's season got off to a slightly slower start than 2018's, as measured in tax returns received by the IRS, but caught up by the beginning of April.





         While many had thought the complexities of the Tax Cuts and Jobs Act might drive more clients to professional preparers, returns e-filed by pros held more or less steady, and self-prepared e-filings rose by 4.2 percent over the previous year, presumably driven by the increase in the standard deduction.














Refunds were a major issue, but by the end of the season it was clear that overall, the number of overall refunds had remained steady. was a very modest decline in the size of the average refund issued — it was off 1.5 percent for all refunds and down 2.3 percent for direct deposit refunds. Presumably most of that small decline was attributable to more money going in to employees' paychecks each period due to new withholding tables issued as a result of the TCJA.


What sparked the initial debate about refund size were the significant differences between 2018 refunds and 2019 refunds in the first few weeks of tax season — but those large gaps closed almost entirely by the end of February. the average refund off slightly 2018, it's no surprise that the total amount of refunds issued would be down, too — by just 2.1 percent overall. Interestingly, the total of direct deposit refunds was pretty much flat.


Perhaps the greatest impact of the TCJA can be seen in the number of visits to over the course of this tax season — it was up 8.6 percent over 2018.




New York is offering Trump’s taxes but Democrats may not bite

By Laura Davison


The State of New York is poised to enact a law that would allow Congress to obtain President Donald Trump’s state tax returns. But the U.S. House Democrat who could get them may not take New York up on its offer.

The Democratic-controlled New York State Assembly could vote this week on a bill that would give House Ways and Means Committee Chairman Richard Neal the power to request the state returns of any New York taxpayer. The State Senate, which Democrats won control of in November, passed the bill last week and Governor Andrew Cuomo has said he will sign it if it passes both houses.


The law would give congressional Democrats something they’ve been craving for years — a more complete view of Trump’s finances and whether he misused the tax code to reduce his burden.


However, much to the dismay of some members of his party, Neal, a Massachusetts representative, has indicated he won’t ask New York for the state returns because it could derail his attempts to get Treasury Secretary Steven Mnuchin to hand over six years of Trump’s personal and business federal returns.


It’s About the IRS Audits

Neal, mindful of Supreme Court opinions in other cases that such requests require a legislative purpose, has told Mnuchin he wants the returns so his committee can oversee the routine audits the Internal Revenue Service performs on every president and vice president. The Trump administration has disputed that claim, saying Congress just wants the president’s returns for political sport.


“This wouldn’t matter for our purposes,” Neal spokesman Daniel Rubin said about the New York state bill. “The committee is investigating the mandatory presidential audit program at the IRS to determine whether or not the program needs to be codified into federal law.”


But House Judiciary Committee Chairman Jerrold Nadler, who is locked in legal battles for information about the report of Special Counsel Robert Mueller and other issues, said in a statement that the New York “legislation would make the work of a federal committee a little easier. If confronted with inability to receive the federal tax return, we can turn to New York State.”


Under the New York bill, only the chairmen of the tax-writing committees could request the state returns, meaning Nadler and others investigating Trump, like Oversight Committee Chairman Elijah Cummings of Maryland and Intelligence Committee Chairman Adam Schiff of California, would have to rely on Neal — or Senate Finance Chairman Chuck Grassley, an Iowa Republican, who is opposed to investigating the president’s taxes.


Neal has been demanding that the Treasury Department hand over Trump’s federal returns for more than a month. Mnuchin has repeatedly refused, and Neal subpoenaed the documents on Friday.


“Right now the chairman is focused on the issue of whether the IRS has done their duty” to audit presidents, Representative Tom Suozzi, a New York Democrat, said about Neal. “All the other stuff that is swirling around the president is very interesting, but that’s a separate topic than what the chairman of the committee is working on.”


Undercutting Legal Argument

By asking for the New York returns, which aren’t related to IRS audits, Neal could undercut his argument for the federal documents and jeopardize his chances in the likely event the dispute ends up in court.


“The game here is complicated,” Frank Clemente, the executive director for the progressive Americans for Tax Fairness, said. “The chairman is smart to stay the steady course with his narrowly tailored purpose.”


Neal’s refusal to engage with New York on the state returns would also set up a debate between Neal and progressives who are already frustrated with him for waiting several months after Democrats won control of the House to make his first request for the tax documents. Neal’s reluctance to access the New York returns will open him up to even more criticism.


“It’s an option not just for Neal, but also for future chairmen of congressional tax committees," said New York State Senator Brad Hoylman, who sponsored the legislation in the State Senate. “It’s important if there are future presidents who don’t share their taxes. The more information the better.”


The New York law would give Neal a potentially less litigious path to gain insight on the president’s financial situation, including how much he has paid in taxes and how he earns money. The returns would show Trump’s income and business losses or gains, but it would be a far less complete picture than the federal returns. Items such as charitable contributions and information about his income earned in other states wouldn’t appear on the New York return.


As Congress has faced obstacles in investigating Trump and his administration, state governments have increasingly sought to pursue legislation that would put checks on the president. So far this year, legislatures in 18 states have introduced bills that would require presidential candidates to release several years of tax returns in order to appear on the ballot.


“As the situation in Washington unfolds the desire by my colleagues is even greater to pass this bill,” Hoylman said. “Applying pressure in New York is a positive thing for the efforts by Chairman Neal.”

— With assistance from Keshia Clukey




Investors and business owners may benefit from 199A QBI deduction

By Brett Cotler


Beginning with the 2018 taxable year, owners of pass-through entities engaged in qualified businesses can claim a U.S. federal income tax deduction up to 20 percent on their qualified business income. This QBI deduction could possibly bring a taxpayer’s effective tax rate on such income down from 37 percent (without the deduction) to 29.6 percent (with the deduction). Planning for this deduction can yield significant tax savings for investors and business owners. Here are some questions and answers about the qualified business income deduction:


Can investments funds pass along QBI to their investors?

QBI means income from a qualified trade or business, and certain income from real estate investment trusts and publicly traded partnerships, or PTPs, may also give rise to QBI.


A private investment fund that invests in REITs and master limited partnerships can generally pass-through to its investors its distributive share of QBI from qualified REIT dividends and qualified PTP income. QBI from qualified REIT dividends and qualified PTP income is not subject to the W-2 wage limitation or the basis limitation. Investment funds that rely on the qualifying income exception from the PTP rules do not generate qualified PTP income because investment and trading activities are a specified services trade or business.


A mutual fund may pass through qualified REIT dividends to its shareholders. The IRS is continuing to study whether QBI received by a mutual fund from a PTP may be passed through to the mutual fund’s shareholders.


Can real estate investment funds pass QBI to their investors?

Income from real estate will generally qualify for the QBI deduction if the real estate activities qualify as a trade or business. Therefore, the fund must be engaged in a real estate trade or business to pass QBI to investors. As there is no participation requirement, passive investors in real estate funds that are engaged in a trade or business for U.S. federal income tax purposes may be able to claim a QBI deduction.


Whether a real estate enterprise constitutes a trade or business is determined under general income tax principles. However, conflicting authorities have created uncertainty as to when rental real estate activities rise to the level of a trade or business. Recognizing this uncertainty, the IRS proposed a safe harbor to allow taxpayers that own rental real estate businesses to claim this deduction.


Generally, the safe harbor imposes record-keeping requirements on the business and also requires that 250 hours of rental services are performed annually by the business’s employees, owners or agents. The safe harbor must be met separately with respect to residential and commercial rental activities. Triple net leases are excluded from the safe harbor. If a rental real estate enterprise does not meet the safe harbor, the rental real estate activities may still constitute a trade or business under section 162 of the tax code. Taxpayers should be made aware of these requirements prospectively so they can endeavor to come within the safe harbor.


Who else can claim the QBI deduction?

Owners of pass-through entities and sole proprietors that have QBI may claim this deduction, even if they do not actively participate in the business. Recently finalized regulations define pass-through entities as partnerships (other than PTPs) or S corporations owned, directly or indirectly, by at least one individual, estate or trust. Certain trusts or estates may also be a pass-through entity for this purpose.


The definition of “qualified trade or business” excludes a “specified service trade or business.” Income in excess of the phase-in amounts from a specified service trade or business is not eligible for the QBI deduction. (Taxpayers with taxable income below $157,500, or $315,000 if married, can claim the QBI without regard to the wage or UBIA — unadjusted basis immediately after acquisition — limitations and with respect to income from a specified service trade or business.) Businesses that constitute a specified services trade or business include investment managers other than financial services businesses, brokerages, medical, accounting and consulting practices, performing arts businesses, athletic businesses (including professional sports clubs) and any trade or business that relies principally on the skill or reputation of its employees.


Recently finalized Treasury regulations contain an anti-abuse provision preventing the segregation of QBI from non-QBI activities. Where an entity conducts both a specified services trade or business and also other qualified business activities, the entity’s owners generally cannot spin out the QBI activities into a new entity, charge a fee or rent to the original entity and claim a QBI deduction with respect to the QBI from the new entity.


How is QBI calculated?

The determination of QBI is made at the level of the trade or business. An entity or sole proprietor must be engaged in a trade or business (other than a specified services trade or business) to have QBI. Taxpayers claiming this deduction do not need to satisfy any participation requirement or be themselves engaged in a trade or business. QBI is the net income from such trade or business.


The maximum deduction allowed is 20 percent of QBI. Generally, the amount of QBI from a qualified trade or business eligible for deduction is limited to the lesser of:


(1) 20 percent of the taxpayer’s QBI with respect to the qualified trade or business, and

(2) the greater of:

(A) 50 percent of the W-2 wages with respect to the qualified trade or business, and

(B) the sum of 25 percent of the W-2 wages with respect to the qualified trade or business plus 2.5 percent of the unadjusted basis immediately after acquisition (UBIA) of all qualified property.


Like QBI, the determination of the W-2 wage and UBIA limitations is also made at the level of the trade or business. These limitations do not apply to QBI from qualified REIT dividends or qualified PTP income. The partners’ share of QBI from a partnership or S corporation will be reflected on their Schedule K-1. The deduction for QBI may be further limited at the partner level.


In situations where one or more trades or businesses are operated across multiple entities for legal, economic or other non-tax reasons, taxpayers may aggregate income, expenses (including wage expenses) and UBIA across entities. Taxpayers may choose to aggregate entities that have QBI where there is common ownership for more than half the year, the businesses or entities to be aggregated generally relate to each other to be viewed as a single enterprise, and certain other requirements are met. Aggregating QBI across entities may help taxpayers optimize the amount of the QBI deduction.


Given the wage and basis limitations, trade or business rules, the requirements to meet the real estate safe harbor and certain other aspects of 199A and the proposed and final Treasury regulations and other IRS guidance, tax planning can result in significant tax benefits to investors and business owners. 




States moving fast on economic nexus standards

By Roger Russell


The 19th annual Bloomberg Tax Survey of State Tax Departments found that states with an economic nexus standard for sales tax more than doubled over the last year in the wake of the Supreme Court’s Wayfair ruling. Thirty-three states responded that they now have an economic standard in place for sales tax nexus. Six states said they have an economic nexus standard that is not currently being enforced due to the legislation’s effective date or pending litigation.


Nexus is the minimum amount of contact between a taxpayer and a state allowing the state to tax a business on its activities or require it to collect and remit sales tax.


Every year, senior tax officials are asked to clarify their states’ position on a number of areas. This year, all 50 states, Washington D.C. and New York City responded to the survey. In addition to questions on sales tax nexus, Bloomberg Tax asked questions on corporate income tax nexus, conformity to federal tax reform, state sourcing provisions, and state policy for marketplace facilitators.


Fourteen states said that their corporate nexus standard is based on factor presence, according to Christine Boeckel, deputy editorial director at Bloomberg Tax. “This matches the amount from 2018 responses. Also matching the 2018 results of these states, five said that they conform in whole or in part to the Multistate Tax Compact’s model statute, ‘Factor Presence Nexus Standard for Business Activity.’ Alabama and Tennessee reported that they generally conform to the model statute, while California, Colorado and Connecticut stated that they only partially conform to the model statute.”


For the first time, the survey asked whether an employee flying into the state on a company airplane for business purposes would create nexus. “Twenty-five states said that this activity creates nexus for the corporation,” said Boeckel. “The answers were the same regardless of the number of flights — one to four versus five or more — into the state.”


This year the survey asked whether states conform to a variety of code sections impacted by the Tax Cuts and Jobs Act. “Of the code sections addressed, states most often said that they conform to the changes made to Code Section 163(j), which limits the business interest expense deduction,” said Boeckel. “States are least likely to conform to the new Section 199A, which allows a deduction for qualified business income, with only 11 states responding ‘Yes.’”


States were also asked to identify their general sourcing method for sourcing receipts from sales other than sales of tangible personal property. Twenty-eight states, a significant increase over 2018, said that they use a market-based sourcing approach, while 11 states, one less than last year, stated that they use a cost-of-performance approach.


“Seventeen states responded that they apply different sourcing methods to different sourcing methods to different categories of receipts,” Boeckel said.


According to the survey, 18 states classify guaranteed payments for services, other than personal or professional services, as business income. “Only one state, Mississippi, stated that it classifies these payments as non-business income,” said Boeckel.


“New for 2019, we asked the states to identify the extent to which they comply with the federal partnership audit rules. Among these questions, we asked states whether they make adjustments, determine imputed tax, and assess and collect tax at the partner level or at the entity level. Fourteen states responded that they conduct these activities at the entity level, while nearly double the number of states — 27 — said they do so at the individual partner level. Ten states, including Illinois and Pennsylvania, responded ‘Yes’ to both questions.’”


For the first time, the survey asked states to identify the timeframe used and the type of transactions counted when determining whether their economic sales tax nexus has been met. “The responses also showed that sales for resale, tax-exempt sales of tangible personal property, sales of services and sales of electronically delivered items are almost always counted, but sales of intangibles are counted less frequently,” Boeckel said.


“This year, we added questions addressing sales made on marketplace platforms,” she said. “Thirteen states said they require third-party marketplace facilitators to collect and remit sales tax on sales made by out-of-state corporations using their platforms. Of these 13 states, only nine said that the marketplace seller is relieved of the liability for the tax if the third-party marketplace facilitator is required to collect and remit the tax on their behalf.”


“We also asked whether nexus is created when an out-of-state corporation makes sales into the state through a third-party facilitator,” Boeckel said. “In the majority of states, using a third-party facilitator creates nexus when the facilitator stores inventory in the state. However, in most states the out-of-state corporation will not have nexus just because the third-party facilitator does.”




IRS estimates over a quarter of EITC payments were improper

By Michael Cohn


The Internal Revenue Service estimates that 25.06 percent of Earned Income Tax Credit payments (translating to about $18.4 billion) were issued improperly in fiscal year 2018.


But refundable tax credits like the EITC still aren’t being classified and reported properly by the Internal Revenue Service as a high risk for improper payments, according to a new government report.


The report, from the Treasury Inspector General for Tax Administration, noted that the federal Office of Management and Budget has declared the EITC a high-risk program that’s subject to specific reporting requirements by the Treasury Department.


The IRS provided all the required information regarding EITC improper payment information for inclusion in the Department of the Treasury's Agency Financial Report Fiscal Year 2018. While the agency hasn’t reduced the overall EITC improper payment rate to less than 10 percent, it has been approved for an exception to the annual reduction target reporting requirement.


As an alternative, the Treasury and the OMB collaborated on the development of a series of EITC supplemental measures for use, instead of meeting reduction targets. The IRS actually holds up payment of the EITC and other refundable tax credits for an additional period of time during tax season in order to double-check the information. Tax preparers are also required to fill out a due diligence checklist before filing tax returns claiming the tax credits.


The IRS reportedly has a higher audit rate for low-income taxpayers claiming the EITC and other refundable tax credits than for much wealthier taxpayers, according to recent reports from the investigative news site ProPublica. “In 2017, EITC recipients were audited at twice the rate of taxpayers with income between $200,000 and $500,000,” said ProPublica. “Only households with income above $1 million were examined at significantly higher rates.”


Not only the EITC is a problem for the IRS, according to the TIGTA report. The agency continues to incorrectly rate the improper payment risk associated with other refundable credits like the Additional Child Tax Credit, the American Opportunity Tax Credit, and the Premium Tax Credit. The incorrect rating allows the IRS to circumvent reporting required information for these programs to the Department of the Treasury for inclusion in the Agency Financial Report.


TIGTA identified over 2.2 million tax returns that showed an income discrepancy of $1,000 or more from what was reported on the tax returns that weren’t selected for further review by the IRS. These taxpayers received over $10.1 billion in credits, including $6.0 billion in EITCs and over $1.9 billion in Additional Child Tax Credits.


TIGTA acknowledged the IRS has started taking corrective actions to address earlier deficiencies reported by the inspector general. Those efforts are leading to better identification and recovery of erroneous EITC payments.


In its latest report, TIGTA suggested the IRS implement a process to systematically identify and evaluate tax returns filed by individuals who have non-work Social Security numbers to prevent erroneous refunds of EITCs and ACTCs. IRS management agreed with this recommendation and plans to take appropriate corrective actions to identify and evaluate tax returns filed by individuals who use non-work Social Security numbers.


“We reach out to and educate taxpayers and tax practitioners to reduce fraud and errors and to protect revenue, and we pursue traditional compliance activities where incorrect payments are made,” wrote IRS CFO Ursula Gillis in response to the report. “However, we could accomplish more with additional tools.”


She pointed to some of the proposals in the Trump administration’s budget plan for fiscal year 2020, which call for increasing oversight of paid tax preparers to help “reduce the need for post-refund enforcement activity,” as well as providing more flexible authority for the IRS to address correctable errors when taxpayers claim credits for which they’re ineligible or they exceed the lifetime limits, or when they fail to submit the required documentation.




Inside Trump’s transcripts

By Jim Buttonow


Like most, I have read the New York Times article that analyzes President Donald Trump’s past tax returns. The Times was able to obtain access to tax return information from someone who had “legal access” to the president’s IRS transcripts for the 1985-1994 tax years. These electronic IRS records provide a wealth of information – and the Times was able to piece together 10 years of President Trump’s tax history.


But first, as a point of disclosure, I am not taking any opinion on the ethical issue of whether our president or any elected officials should disclose their tax returns to the public. Unless tax return disclosure becomes a requirement to run for office, I pass no judgment on any public official who wants to keep their financial affairs private.


However, taxpayers and tax professionals should take note of the wealth of information found in IRS transcripts. And those who want to guard their tax information should take precautions on who they authorize to receive this information from the IRS.

Accessing Trump’s 1985-1994 transcripts

IRS transcripts were at the center of the Times’ article on Trump’s finances for 1985-1994. The newspaper allegedly obtained Trump’s tax information from his Form 1040 tax return transcript to analyze his finances.


The Times reported that these transcripts were provided by a person who had “legal access” to this private tax information. It is unlikely that the person had consent from President Trump to disclose this information to outside sources. Only President Trump’s authorized third parties could legally access this information. The most common authorization is to a CPA or attorney. To authorize this person, the taxpayer ink-signs a Form 2848, “Power of Attorney.” Another method is to authorize (again through an ink signature) a third-party, such as a tax preparer to get your information through a Form 8821, “Tax Information Authorization.” Most authorized third parties through Form 2848 or 8821 are trusted providers and likely assisting President Trump with tax matters, such as filing a return. The Times article is silent on how the legal access was granted.


Another common method to access transcripts is to order them via Form 4506-T, “Request for Transcript of a Tax Return.” Taxpayers or their authorized third parties can request that the IRS mail them a copy of their transcript using this form. This one-time authorization to access tax return information is commonly used in the mortgage industry to assist lenders in the loan application process.


The three types of IRS transcripts

For many taxpayers, the Times article poses many questions about the source of the tax information. Most taxpayers have no idea what an “IRS transcript” is or what is contained in these transcripts. Furthermore, most people have never seen their transcripts and have no idea on how to obtain them.

Most individual taxpayers have three IRS transcripts for each tax form filed for each year:

  • A tax return transcript — an electronic printout of most of the line items on a filed tax return that can go back to the past three years.
  • An account transcript — a summary of key items on a tax return and a detailed list of most transactions for that tax year that is available back six years. The account transcript also has an account balance owed, but it is not a reliable resource for determining how much a taxpayer owes.
  • A Wage & Income transcript — all information statements (Forms W-2, 1099, etc.) filed under the taxpayer’s taxpayer identification number going back 10 years.


There are two other types of transcripts that are derivatives of the three primary transcripts: the “record of account” transcript which combines the tax return and account transcripts into one transcript and the “verification of non-filing letter” which provides the taxpayer a confirmation that a return was not filed for that year.

Tax return transcripts

From the Times article, it seems clear that the authors were able to obtain the “tax return transcript” for 1985-1994 in order to glean the detailed information about Trump’s tax return reporting. It is the only transcript that could provide the type of detail reported.


Presumably, the tax return transcripts provided to the Times were obtained years ago, as the IRS does not make this information readily available past the last three years.


The person who secured 10 years of return transcripts would likely have had to request these documents over several years. It would require multiple requests over several years to obtain the 10-year span of tax return transcripts because tax return transcripts are only kept for the past three years.


The Times article does not provide any information about Trump’s claims that he has been audited for many of the past tax years. That information could have been obtained in an IRS account transcript.


In the transaction code section of the account transcript, the transcript would show an “audit indicator” (usually a transaction code “420” or “424”). The audit results (additional tax) would also be shown if the audit was complete (TC 300). Additional penalties from the audit would also be shown on the transcript.


Wage & Income transcripts, meanwhile, provide a great deal of information about a taxpayer’s income and investments. For example, a taxpayer’s interest income would be reported on Form 1099-INT, stock sales on Form 1099-B, and partnership/S corporation income and activity on Schedule K-1. All of these forms, and more, are reported in a taxpayer’s Wage & Income transcript.


The Times article highlighted a spike in President Trump’s interest income for $52.9 million in 1989. The W&I transcript would likely show the source. It would also show investment sales and activity.


W&I transcripts provide very useful information for taxpayers. Taxpayers can use their W&I transcripts to reconstruct income and to file back tax returns. Unfortunately, taxpayers still cannot use the W&I transcript to file current year returns as it is not available until May – well after the April 15 filing deadline. Extension filers can pull their W&I transcript in the summer and use this information to file an accurate return. Confirming the return includes all Forms W-2/1099 and other information statements is a great way to avoid an IRS underreporter notice and an audit for unreported income.

‘Legal access’ questions remain

How President Trump’s old tax return transcripts turned up is a mystery. What is more of a mystery is who shared them and how they got them. And there may be legal issues for the person who supplied them to the Times. For starters, if the disclosing person was involved in the preparation of Trump’s tax returns, they likely were not given the permission to disclose the information. This likely would be a criminal violation of Internal Revenue Code Section 7216 which prohibits tax preparers from disclosing tax return information to a third-party without the consent of the taxpayer.


The Times reported that the person had “legal access” to the transcripts. If this is true, there is a document trail that could round up a short list of people who were authorized to obtain this information.


Taxpayers looking closely at this story can now understand the information available through IRS transcripts. Taxpayers should also learn another lesson: Watch out who you give authorization to view your tax information.




An April tax boon for SALT-hit states that struggled to forecast

By Elizabeth Campbell and Elise Young


States are enjoying windfalls after struggling to predict how President Donald Trump’s federal tax law changes would ripple through their revenue.


All 15 of the states that have reported April tax collections so far have seen them come in better than expected, according to a list compiled by the National Association of State Budget Officers. California, Illinois, Connecticut are among them, and New Jersey is expected to report its tally next week. Governor Phil Murphy said this week that tax collections will be more than $250 million above projections.


“It gives decision-makers cushion,’’ said John Hicks, executive director of the Washington-based National Association of State Budget Officers. “Where states are debating or on the margins, this little extra revenue certainly makes this a little easier.’’


The influx is providing extra cash for governments already benefiting from the nearly decade-long economic expansion and is coming just as many set their budgets for the coming fiscal year. In some cases, it’s making up for shortfalls earlier in the budget year as tax revenue lagged official forecasts because of the difficulty in predicting how the U.S. tax changes, including the $10,000 cap on state and local deductions, would ripple down through the state capitals.


In California, for example, officials said that taxpayers procrastinated in filing their returns this year over concern that the new deduction limit would drive up what they owe. Then in April, the state collected about $3 billion more in personal-income taxes than Governor Gavin Newsom’s forecast, making up for a shortfall earlier this year and adding to the government’s swelling surplus fueled by stock market gains.


Moody’s Investors Service said California’s experience bodes well for other high-tax states, and Mikhail Foux, head of municipal strategy at Barclays Plc, said most are likely to see revenue surpass expectations in April. Connecticut’s personal-income taxes last month brought in $100 million more than forecast. While New York hasn’t reported April’s figures, its March tax receipts were higher than forecast.


Some are already laying out plans on how to use their extra cash. After Illinois’s April tax collections topped forecasts by $1.5 billion, Governor J.B. Pritzker backed off his proposal to put off some of next year’s pension payment, which critics had derided as a partial pension holiday. That was welcomed by investors, who bid up the price of the state’s bonds, pushing down the yield penalty it pays to the smallest since July because it will help with the government’s massive pension-fund debt.


New Jersey Governor Murphy said on May 6 that he’d put the $250 million of unexpected tax revenue toward homeowner relief from the nation’s highest property taxes if lawmakers approve his proposed millionaire’s tax for the fiscal year starting July 1. But the tax hike on the highest earners faces a challenge in the legislature, where the Senate leader opposes it.


Even so, the extra revenue is a welcome development for Murphy, who promised a more conservative approach to forecasting than the prior administration that was handed a slew of bond-rating downgrades.


Murphy’s job was complicated by the difficulty of determining how the federal changes would affect Garden State residents. From July to January, New Jersey income-tax revenue was down 6 percent, while growth had been forecast at 5.4 percent. In February, S&P Global Ratings warned that even an April bump — on which the state is still counting — might not be enough to fill the hole.


It still remains to be seen how much of the higher-than-expected revenue across states will be recurring or if it’s a one-time bounty, according to the National Association of State Budget Officers.


“We’re seeing good signals and good signs in the economy at large, that always would tend to be correlated with revenue growth,” said Matt Butler, a vice president and senior analyst at Moody’s. “Clearly growing revenue, all else equal, tends to be credit positive for the states.’’

— With assistance from Romy Varghese




California wins three-decade fight over taxpayer's lawsuit

By Roger Russell


In its third ruling on the case, the Supreme Court has come down on the side of California in California Franchise Tax Board v. Hyatt. denying a taxpayer's right to sue the state over its audit. The 26-year history of the case began as an audit procedure and evolved into a constitutional issue.


Gilbert Hyatt, a tech inventor and entrepreneur, moved from California to Nevada in the early 1990s. Hyatt claimed he moved in September 1991, while California claimed he didn’t move until April 1992. At stake was $7.2 million in patent royalties earned during that time. Nevada does not tax personal income.


Hyatt filed suit in a Nevada state court seeking damages for California’s alleged abusive audit and investigation practices. A Nevada jury verdict awarded Hyatt over $400 million in damages and fees. California appealed, arguing that the Constitution’s Full Faith and Credit Clause required Nevada to limit the award to $50,000, the maximum that the state would permit in a similar suit against its own agencies. The Nevada Supreme Court affirmed $1 million of the award and ordered a retrial on another damages issue.


In its 2016 decision, the U.S. Supreme Court was divided as to whether the case Nevada relied on for jurisdiction over the California Franchise Tax Board should be overruled, and therefore affirmed the Nevada court’s jurisdiction, but limited damages to $50,000.


In its third ruling on May 13, 2019, the court resolved its 4-4 split from 2016 when the court had only eight justices.


However, the ruling overruled a 41-year-old precedent in the case of Nevada v. Hall. “The immediate practical implications of Hyatt’s holding that states are wholly immune from suit in the courts of other states are limited because very few such suits currently proceed under the pre-Hyatt rules," said Charles Rothfeld, a partner in law firm Mayer Brown’s Supreme Court & Appellate practice. "But the decision nevertheless is significant for what it says about the Supreme Court’s broader approach to constitutional questions. It shows a willingness to overrule precedent even when there is no compelling need to do so. And because the court found that states are immune from suit even absent any express provision of the Constitution that creates state sovereign immunity, the decision demonstrates that even the conservative Justices sometimes will be willing to depart from 'textualism' in reading the Constitution.”


In its decision, the court endorsed state sovereign immunity, according to Tim Droske, a partner at the law firm of Dorsey & Whitney. “This was the third time this case went before the Supreme Court,” he said. “In the second time, the case was on review, the court was equally divided as to whether Hall should be overruled and thus affirmed the Nevada Supreme Court’s exercise of jurisdiction issued following Justice [Antonin] Scalia’s death and before Justice [Neil] Gorsuch’s confirmation. Now, with the court back to its full nine-member strength, it again granted review on the sole question of whether Hall should be overruled. Reaching the issue, however, required disregarding an argument that the law-of-the-case doctrine precluded the court’s review, finding that argument waived, while also finding that the California Board had not waived its immunity.”

Wider implications?

Some observers are concerned that the conservative majority’s overruling an established precedent in the tax case could pave the way for overturning decisions in other areas as well.


"The division between the five-justice conservative majority and four-justice liberal dissent can be seen as a potential preview of the role of stare decisis as to other constitutional precedents, including Roe v. Wade,” said Droske.


He noted that Justice Clarence Thomas’ summary of the majority’s justification for its holding could readily be adapted by the conservative majority to other precedents: “[Roe v. Wade] is contrary to our constitutional design and the understanding of [due process] shared by the states that ratified the Constitution[‘s] [Fourteenth Amendment]. Stare decisis does not compel continued adherence to this erroneous precedent.”


“Reflecting the future fight that may come before the court, Justice [Stephen] Breyer’s dissent expressly cites to the abortion decision Planned Parenthood of Southeastern Pa. v. Casey, 505 U.S. 833 (1992) for the importance of stare decisis,” said Droske. "Interestingly though, the majority opinion today relies on a theory ‘that the Constitution affirmatively altered the relationships between the states, while also acknowledging that “no constitutional provision explicitly grants this immunity.”


He pointed out that Justice Thomas, writing for the majority, specifically observed that, “There are many other constitutional doctrines that are not spelled out in the Constitution but are nevertheless implicit in its structure and supported by historical practice,” and highlighted examples such as “judicial review, intergovernmental tax immunity, executive immunity, and the president’s removal power.”


“But notably, no mention of substantive rights found under the Due Process Clause or other personal liberties were included in that list," said Droske.




Tax Court dismisses corporate petition for failing to maintain status with state

By Roger Russell


In a decision underscoring the importance of maintaining corporate status with a state, the Tax Court dismissed the petition of a corporation because it was not timely filed by parties with the legal capacity to engage in litigation before the court.


“When a corporation fails to comply with state requirements for maintaining its status — for example, filing annual tax returns, paying state taxes — it can result in dire consequences,” cautioned Barbara Weltman, author of J.K. Lasser’s Small Business Taxes 2019. “For example, a California corporation that didn’t pay its state taxes had its powers, rights and privileges suspended. This occurred during the 90-day period in which it wanted to file a petition in Tax Court. The court rejected the petition, even though the corporation’s powers, rights and privileges were later reinstated.”


In the case, Timbron International Corp. and Timbron Holdings had their “powers, rights, and privileges” suspended by the California Franchise Tax Board for failure to pay state taxes. In July 2016, the IRS issued notices of deficiency for 2010 and 2011. Timbron filed petitions with the Tax Court in October 2016, and the IRS filed an answer in each case the following month. Several months later the IRS moved to dismiss the cases for lack of jurisdiction.


In its opposition to the IRS motions, Timbron did not dispute the actions of the Franchise Tax Board, but stated that they had obtained "certificates of revivor" and were considered “active” as of Sept. 27, 2017. At the Tax Court hearing, the companies argued that under California law they retained “sufficient vitality” to litigate in Tax Court.


Timbron cited a number of cases to support the contention that California courts have allowed a corporation to maintain litigation or an appeal filed at a time when the corporation was suspended and was not properly challenged. The Tax Court rejected the application of such cases.


“However, cases allowing revived prosecuting lawsuits filed at times when the corporations were suspended involved courts of general jurisdiction and claims that were not barred by statutes of limitations or other statutory restrictions,” said the court. “Moreover, the filing of a petition for redetermination of a federal tax deficiency is not contractual but rather a jurisdictional requirement required to engage in litigation in this Court.”




Conflicting tax forms create ‘nightmares’ for some investors

By Lynnley Browning


Brokerage firms are sending tax statements to clients and the IRS with information that differs from the taxes investors ultimately owe, leading some filers to appear to owe tax on profits they never made.


The federal tax code contains two sets of IRS rules — one that defines what information on taxable gains and losses that brokerages must report to their clients and the IRS, and another that defines how individual taxpayers report those gains and losses on their returns.


Those conflicting rules mean that the brokerage statements — known as 1099-Bs — don’t always reflect all of an investor’s accounts or original costs. It’s caused some investors to inadvertently draw the attention of government auditors.


The word "taxes" is engraved on the side of IRS headquarters in Washington, D.C.Andrew Harrer/Bloomberg

That the statements can cause problems for unwary investors “is a dirty little secret,” said Robert Green, an accountant and the chief executive officer of GreenTraderTax, an accounting and consulting firm in Ridgefield, Connecticut. “Brokers don’t want this publicized.”


Edward Zollars, a certified public accountant, said his firm, Thomas, Zollars & Lynch in Phoenix, had a client who’d exercised $135,000 in stock options granted for $39,000. The client’s recent statement, from E*Trade, showed those figures but another one as well: a $96,000 “realized gain,” or the difference between the two figures.


Taxes Withheld

While the statement made it look like the client owed ordinary taxes of around $35,000 on that gain, he didn’t. The statement didn’t reflect that the client’s employer had already withheld tax when the options were exercised. E*Trade didn’t respond to requests for comment.


“You can get in trouble just following the 1099,” Zollars said, adding that it can create tax-season “nightmares.”

In most cases, brokerages are simply following IRS rules — which in this case predate, and weren’t changed by, the 2017 federal tax overhaul.


But nine clients of accountant Mark Fichtenbaum this year received 1099-B forms from online broker and wealth manager TD Ameritrade with incorrect values for their investments in options tied to the S&P 500 stock index.



Under an accounting system known as mark-to-market, the statements are supposed to reflect values as of the last business day of the year, usually Dec. 31; instead, they showed the reflected values on the last day the options traded. Due to the stock market’s volatility last December, the different dates made the investors look to the IRS like they’d made millions more in taxable profits than they actually had.


In an April 3 letter to one client, TD Ameritrade said that GainsKeeper, the trade-accounting software company it uses to prepare the statements, deploys its own methodology to track the values.


“GainsKeeper has informed us that they use their methodology consistently,” TD Ameritrade said in the letter, adding that it “cannot amend” the document. “Unfortunately, this is what occurred.” The letter counseled that under special IRS rules for the contracts, the customers would get the tax back in the following year, when the amounts reversed.


Looking for ‘Reality’

“So we’re going to give the government $1 million for tax on phantom gains and get it back the next year? Seriously?” said Fichtenbaum, counsel to Twenty-First Securities Corp., a brokerage and financial services firm in New York. He provided some of his clients’ statements for review.


Had GainsKeeper used that same methodology on all open S&P 500 contracts as of Dec. 31, it would have distorted clients’ gains by $6 billion, he said. “I am not looking for perfection, just reality.”


Rebecca Niiya, a TD Ameritrade spokeswoman, said the brokerage was merely following the rules. Stevie Conlon, a tax and regulatory counsel for the Wolters Kluwer unit that oversees GainsKeeper, said that due to murkiness in IRS rules on computing values for assets like options contracts, the firm relies on separate rules in estates and gift tax laws. “There’s no explicit guidance that tells us how to do it,” she said, adding that another broker “could come up with a different price.”


Even though individual investors receive separate account statements from brokerages that correctly show their gains and losses, many individual investors rely on the 1099-Bs to tell them how much tax they owe on profits and losses in stocks, commodities, regulated futures contracts and options, among other securities, as well as on barter transactions.


Finding Cheaters

The IRS in theory matches the statements to federal returns to root out cheaters. But even though a copy goes to the IRS, “you can’t rely on the 1099-B for your return,” said Muhammad Akram, an accountant and the founder of Akram & Associates in Cary, North Carolina, which caters to small hedge funds.


Since 2011, the statements must track and disclose an investor’s cost basis, or amount paid, for an asset bought that year or later — a requirement that prohibited the earlier practice of self-reporting profits. Brokers have to send the previous tax year’s statements by Jan. 31, but routinely issue corrected statements without warning, sometimes more than once, after they receive details on distributions from mutual funds, real-estate investment trusts and other assets.


Smaller brokerages are more likely to issue statements that misreport basis or dates, Akram said, because they invest less in the technology required to generate the reports and often don’t use third-party software to tally values. But even Wall Street brokerages have inconsistencies, especially with reporting dividend income, he said.


Complex Holdings

“It’s systemic,” said Akram.


The statements can be a particularly unreliable tax guide for investors with complex assets like futures, options and exercised stock options, accountants say. Also left in the dark are investors who have multiple accounts at a single brokerage, or have portfolios across multiple wealth managers, and taxpayers who’ve inherited portfolios, said Charles Sarowitz, an accountant and founder of Sarowitz Milito & Co. in Brooklyn, New York.

Statements also can’t detail instances across multiple brokerage accounts in which investors sell securities at a loss and purchase the same asset or one “substantially identical” before or after 30 days, known as a wash sale.

And for investors in master-limited partnerships, common in the oil and gas industry, “there’s never a correct basis” in the brokerage statements because the partnerships typically issue final performance data weeks after the brokerage issues the 1099-B, Sarowitz said.


Software Solution

Big hedge funds routinely use third-party trade software from firms like TradeLog to reconcile brokerage statements and trading logs “because they know” the statements “are screwed up,” Green said. But individual investors and smaller funds typically don’t.


So what’s an investor to do?


An IRS spokesman said that an investor could ask his or her brokerage for a corrected statement — something Fichtenbaum said had worked for only one of his many clients with misdated options. And while taxpayers can enter adjustments onto their returns, that pits the statements against those entries and creates something he said no one wants: “a good chance somebody at the IRS is going to audit the return.”




States sue to learn why Trump changed IRS donor-reporting rules

By Erik Larson


New York and New Jersey have sued to find out why President Donald Trump’s administration scrapped an Internal Revenue Service rule requiring some tax-exempt organizations to disclose their donors.


The change, announced in July 2018, eliminates from federal and state filings a category of information the states rely on to identify potential self-dealing transactions, criminal conduct and other risks in the nonprofit sector, New York Attorney General Letitia James said in a statement Monday.


James and her New Jersey counterpart, Gurbir Grewal, both Democrats, sued the IRS and the Treasury Department in federal court in Manhattan, accusing them of failing to respond to a federal Freedom of Information Act request filed in October. The FOIA sought to learn the reasoning for the change, which was allegedly made without the required period of public notice.


The IRS had no immediate comment on the suit.


The change doesn’t apply to 501(c)(3) tax-exempt groups such as public charities and private foundations, James said, but does apply to thousands of 501(c)(4) groups, such as social welfare organizations, labor unions and business groups.


James and Grewal have statutory oversight of nonprofits in their states. James’s office has a lawsuit pending against Trump’s personal charity over alleged self-dealing. She is also investigating the nonprofit status of the National Rifle Association. Monday’s lawsuit is unrelated.




Millionaires flee their homelands as tensions rise and taxes bite

By Alex Sazonov


The world’s wealthy are increasingly on the move.


About 108,000 millionaires migrated across borders last year, a 14 percent increase from the prior year, and more than double the level in 2013, according to Johannesburg-based New World Wealth. Australia, U.S. and Canada are the top destinations, according to the research firm, while China and Russia are the biggest losers. The U.K. saw around 3,000 millionaires depart last year with Brexit and taxation cited as possible reasons.


Wealth migration figures point to present conditions — such as crime, lack of business opportunities or religious tensions — but can also be a key future indicator, said Andrew Amoils, head of research at New World Wealth.


“It can be a sign of bad things to come as high-net-worth individuals are often the first people to leave — they have the means to leave unlike middle-class citizens,” he said.


Top Destinations

Australia tops most "wish lists" for immigrants because of its perceived safety, no inheritance tax and strong business ties to China, Japan and South Korea. It also stands out for its sustained growth, having escaped the financial crisis largely unscathed and avoided recessions for the past 27 years.


The U.S. was the second most popular destination in 2018, with New York City, Los Angeles, Miami and the San Francisco Bay area the preferred options.


China and India

China’s tightening grip on capital outflows in recent years has placed many of the country’s wealthier citizens in the crosshairs of the taxman, leading to a shift of assets and people. Some rich Asians also move to developed countries looking for more comfort or to improve their children’s education.


The outflow of high-net worth individuals from China and India isn’t particularly concerning from an economic standpoint as far more new millionaires are being created there than are leaving, New World Wealth said.


"Once the standard of living in these countries improves, we expect several wealthy people to move back," Amoils said.


Volatile emerging markets continued to fuel movement, with Turkey losing 4,000 millionaires last year, the third straight year that many have left. About 7,000 millionaires left Russia last year as the country grappled under sanctions imposed over its annexation of Crimea.


The desire for privacy is also prompting rich individuals to reconsider their place of residence.


Under the Common Reporting Standard, launched by the Organisation for Economic Co-operation & Development in 2017, banks and other financial institutions are disclosing data on foreign account holders to their local tax authority. Authorities automatically exchange relevant information with their counterparts overseas annually, allowing governments to zero in on tax evaders. More than 100 jurisdictions have joined CRS, setting a new precedent for the global exchange of data on offshore assets.


This trend is reflected in the growth in demand for second passports and residencies.


"Many wealthy people are looking for opportunities to reduce risks associated with spreading information about their accounts," said Polina Kuleshova of Henley & Partners, which provides citizenship advice and publishes rankings such as the Quality of Nationality Index.


A record 26 percent of global millionaires will begin to plan for emigration this year, according to Knight Frank’s 2019 wealth report.


Citizenship and residency by investment programs are big business: currently, the industry is worth an estimated $2 billion annually, according to Knight Frank. It’s also drawing concern and criticism.


The Organisation for Economic Co-operation & Development is scrutinizing the potential misuse of these schemes. In October 2018, it released a blacklist of 21 jurisdictions, including Malta and Cyprus, that it believes are undermining international efforts to combat tax evasion.

— With assistance from Tom Metcalf and Ben Stupples




CPA runs aground on Tax Court's reading of hobby loss rules

By Roger Russell


A Florida CPA ran aground on the hobby loss rules in a recent Tax Court case.


Section 1.183-2(b) of the tax regulations provides a “non-exhaustive” list of factors used to determine whether an activity is engaged in for profit. The Tax Court applied this list to the yacht charter activity of Charles Steiner, a Florida CPA and businessman, and his wife to determine that they were not engaged in the business of charter activity with a profit objective, but instead were engaged in the activity “to partially offset the significant fixed costs of maintaining the yacht so it could be sold after they stopped using it for personal purposes.”


In the case, Steiner v. Commissioner, T.C. Memo 2019-25, the court noted that Steiner was a highly successful CPA and businessman. During the 1970s he acquired a number of companies, including an electrical supply business that grew to nearly 1,000 employees, and several hundred million dollars in revenue. He also acquired a communications company and a telephone recovery company.


In 2001 he and his wife purchased a 155-foot motor yacht, The Triumphant Lady, for $4,650,000,


The Triumphant Lady had a full-time captain and crew. In 2006 the Steiners undertook a $10,839,000 refit of the yacht, which was completed in 2009. In 2008 they hired Captain Bryan Pridgeon to complete the refit and pilot the yacht.


Until 2009 the Steiners used The Triumphant Lady exclusively for personal purposes. That all changed when a yacht broker approached them about making the yacht available for a charter.


The Steiners continued to use the boat for personal purposes until 2010, when they decided to sell it due to Mr. Steiner’s declining mobility and the couple’s financial concerns. They offered the boat for charter during this period, until January 2012 when the boat sold for $4,455,000.


During 2011 and 2012, the Steiners continued to pay Captain Pridgeon and the crew; they also paid docking, utility fees and management fees. They reported losses of $705,406 in 2011 and $122,420 for 2012, which they deducted from their income of $5,478,220 and $10,946,561 for 2011 and 2012, respectively. The IRS determined that the charter activity was not operated for profit and denied all but $164,690 of the 2011 loss and all of the loss deduction claimed for 2012.


After listing the tax regulation’s profit motive factors, the court decided in favor of the IRS, having found only one factor that applied to the Steiners: the “Personal Pleasure or Recreation” factor. In this case, it meant that, although the Steiners enjoyed boating, there was no indication that they derived recreation or pleasure from the charter activity.


Among the other factors is “carrying on an activity in a businesslike manner,” which may indicate a profit objective. The court said this factor favored the iRS because the Steiners’ tax reporting was not businesslike. They failed to deduct depreciation expenses to which they were entitled, and for 2010 deducted only $30 of charter-related costs even though the activity incurred significant expenses.




The Wolters Kluwer CCH outage: What happened?

By Ranica Arrowsmith


On Monday May 6, between the hours of 8-10 a.m. E.T., accountants across the country started realizing their CCH products, which are based in the cloud, were down. Some users speculated online that it was an unannounced maintenance outage, but it soon became clear that something was wrong.


On Tuesday a PR representative from Wolters Kluwer Tax & Accounting, which makes the CCH products, confirmed the outage was the result of a malware attack:


“On Monday May 6, we started seeing technical anomalies in a number of our platforms and applications,” the statement given to Accounting Today reads. “We immediately started investigating and discovered the installation of malware. As a precaution, in parallel, we decided to take a broader range of platforms and applications offline. With this action, we aimed to quickly limit the impact this malware could have had, giving us the opportunity to investigate the issue with assistance from third-party forensics consultants and work on a solution. Unfortunately, this impacted our communication channels and limited our ability to share updates. On May 7, we were able to restore service to a number of applications and platforms.”


The limited ability to share updates angered CCH users, many of whom took to social media to air their grievances against a cloud partner they perceive to be ill-prepared for maintaining ongoing service and proper security online.


Despite CCH stating that a number of applications and platforms were up and running today, May 7, several users on a Reddit thread on the topic have stated that as of this morning in Florida, Maine, Texas, Pittsburgh and South Carolina, their CCH systems are still down.


CCH users on Reddit and Twitter said services affected include portal functionality, e-filing, updates and authorizations. However, as CCH officials stated above, all functionality was taken offline as a precaution.


Reassuring customers for now, CCH officials also said, “We have seen no evidence that customer data was taken or that there was a breach of confidentiality of that data. Also, there is no reason to believe that our customers have been infected through our platforms and applications. Our investigation is ongoing. We want to apologize for any inconvenience this may have caused.”


Reddit user @paidgoogler posted a statement one of their clients received from their CCH representative. An employee of a Florida-based firm who wished to remain anonymous confirmed that multiple firms received this same email. (Accounting Today is awaiting confirmation from CCH that the letter below was in fact written by a CCH rep.)


"I appreciate everyone’s patience with the fact that this update is just now getting to you (as you might imagine it’s been a busy morning for me)," the rep wrote. "I spoke with many of you yesterday so some of this may be a repeat. As you are well aware, the CCH outage from yesterday is still occurring today. I’m not going to speculate as to the nature of this because I’m sure you’ve already done that for me and I’m aware of what is being said on the forums/message boards and our competitors (thank you to those of you who sent this over to me).


"Importantly, many of you are awaiting guidance on what you should be doing with your staff today and unfortunately I do not have a good answer for this. Many of you saw the maintenance window message which said that operations would be back up by 8:30AM CST today, which has come and gone. I have not received any updated communication regarding a timeframe. I understand that many of you are looking to me to provide guidance on what you should do with your people today and I’m unable to provide that, however I will let you know that I am approaching my day with the anticipation that CCH will be down through today given how this has played out.


"While I said I’m not going to speculate on the nature of this, I understand that many are concerned about a potential malware attack on areas of the CCH infrastructure. To that end, I will be obtaining our most recent SOC 2 report for you to see the security protocol reports related to our systems and will send over when I get it. Please note that this is not an acknowledgment of this actually being the issue, but rather just an acknowledgment that obviously people are talking and this is a common concern.


"I will update this email as soon as I have additional information for you. While many of you know that I’ll go to great lengths to help you out, I’ll respectfully request that you refrain from calling just to get updates (as I’ll probably spend a good 20 minutes talking your ear off while providing no new information). I will update this thread with additional details as they become available (tonight at the latest)."


This article will be updated as the situation progresses.

Update May 7, 3:15 p.m. ET: The outage seems to be worldwide, not just in North America.

Update May 7, 3:23 p.m. ET: Reddit user Jluvs2dive reports that two employees at their firm received an email from a Wolters Kluwer address that includes a malicious link. The email was reportedly sent from a user named "Tammy" with a Wolters Kluwer email address.

Update May 8, 12:21 p.m. ET: Wolters Kluwer has no further official updates at this time.


Accounting Today's source from Florida informed the magazine that upon attempted login to the CCH Axcess platform, his firm received a message that the system would be up first on Tuesday, May 7 at 8:30 a.m. CST; then Wednesday, May 8 at 3:30 p.m. CST; and now, Thursday, May 9, at 7:00 a.m. CST. See screenshot below.

In addition, Facebook user Diana Maria Shaw Knight stated on the most recent post on the Wolters Kluwer Tax & Accounting page that she logged into Axcess Document early Wednesday morning and was briefly able to view her files: "If you are worried about whether your files are REALLY still there in AxCess Document - they seem to be," Knight wrote. "When I came in early this morning, just for the heck of it, I tried to log in (expecting nothing). And, light of my life, it came up ! (Wish I had known it was up - even if it was at 3 am. COMMUNICATION is KEY.) Anyway, I went in and snagged some files I have needed since Monday and saved them locally. Everything seems to be intact, as though nothing happened. There was a message that said that they were going down again at 7:10 am - and to save and exit prior to that time. And supposedly it will all be back up by tomorrow morning according to that message."

Update May 8, 1:45 p.m. ET: CCH Axcess is back online (see CCH is back up).




Congress examines the tax gap and taxpayer noncompliance

By Michael Cohn


The House Ways and Means Committee held a hearing Thursday to examine taxpayer noncompliance and how it is contributing to the estimated tax gap of approximately $400 billion to $460 billion between taxes owed and actually paid.


“The most recent Internal Revenue Service estimate of the annual gross tax gap is about $460 billion and, after enforcement activities and late payments, the net amount is $400 billion a year,” said House Ways and Means Committee chairman Richard Neal, D-Mass., in his opening statement. “Despite this astounding number, the true tax gap is greater than what the IRS estimates. This is because the IRS estimate does not include taxes owed on income from illegal activities or taxes avoided on certain international activities. The tax gap simply represents estimates of different types of noncompliance with our individual, corporate, and other tax laws.”


He pointed out that there is noncompliance in the form of underreporting, which includes taxpayers who understate their income or overstate their deductions, exemptions, or credits. That accounts for nearly $390 billion of the gross tax gap. Noncompliance by taxpayers who file their tax returns but fail to meet the deadline to pay what they owe accounts for about $40 billion of the gross tax gap.Then noncompliance by taxpayers who are required to file a tax return, but don’t accounts for about $32 billion of the gross tax gap.


Neal pointed out that the amount of the tax gap that the IRS can collect depends on its funding and resources. “Insufficient IRS funding creates incentives for some taxpayers to take aggressive tax positions,” he said. “Well-advised taxpayers, including multinational companies and high-income taxpayers, have the incentives and the resources to do just that.”


While high-income taxpayers have the most opportunity to engage in tax avoidance planning, the IRS isn’t focusing its audits on them. “Instead, in 2017, the IRS targeted low-income, Earned Income Tax Credit taxpayers,” said Neal. “Many question why the IRS is using its limited resources in this manner rather than deploying them on high-income taxpayers and corporations where the return is greater per hour of a revenue agent’s time. Taxpayers are more compliant when they may be audited. But the overall audit rate has plummeted below one-half of one percent. IRS examination personnel have decreased by nearly 5,000 employees — or 38 percent — over seven years, and IRS revenue officers have decreased by over 1,600 employees — or 42 percent — during the same period. With fewer officers, Treasury fails to collect billions of dollars each year.”


The top Republican on the tax-writing committee, Rep. Kevin Brady, R-Texas, took issue with the accusation about budget cuts. "I know many of the other side of the dais today will cry foul and claim that Republicans have 'gutted' the IRS over the years,” he said. "The truth is that the IRS budget has been stable over the last several years and any cuts by Congress were made only when compared to an all-time budget high. Republicans are committed to ensuring that our nation’s tax administrator does the job it’s built to do: administer our tax code. Because especially as it concerns closing the tax gap, the solution must be myriad. There is no one single approach that will fully and cost-effectively address the tax gap. The IRS cannot audit its way out of the tax gap. Solving the tax gap requires multiple solutions across different types of taxes.”


Brady believes the IRS should be paying more attention to the tax compliance of “gig economy” workers and pointed to recent reports from the Treasury Inspector General for Tax Administration. "We know that in order to address this gap, we must address our changing economy,” he said. "'Gig' economy workers — such as folks who drive for Uber or use their home as an Airbnb — contribute greatly to our economy. We support innovation in our workforce and want to ensure these companies can succeed. But as TIGTA, who we will hear from today, recently discovered, there is greater risk of folks who participate in the gig economy of noncompliance. TIGTA recommended to the IRS that the agency develops a strategic plan to address tax administration in the gig economy — and the IRS agreed on its importance. And as TIGTA has found, the IRS can be using its current resources more effectively. There are opportunities that exist to help the IRS complete smarter audits; and GAO has recommended ways in which the IRS could allocate enforcement resources to maximize its audit results.”


J. Russell George, inspector general at TIGTA, presented a report on the tax gap and taxpayer noncompliance and pointed to some of TIGTA’s earlier reports on taxing the gig economy. “In a report evaluating the gig economy’s impact on self-employment tax compliance, TIGTA reported that cases with billions of dollars in potential tax discrepancies involving taxpayers who earn income in the gig economy are not being worked by the IRS,” he said. “Many cases were not selected to be worked by the IRS due to the large volume of discrepancies that were identified and resource constraints. In addition, a lack of an overall gig economy compliance strategy led IRS employees to remove thousands of cases from inventory without justification or with justifications that were inaccurate.”


James R. McTigue, Jr., director of strategic issues at the Government Accountability Office, also presented a report by the GAO on how multiple strategies are needed to address taxpayer noncompliance. “GAO’s work has demonstrated that no single approach will fully and cost effectively address noncompliance since the problem has multiple causes and spans different types of taxes and taxpayers,” said the report. “In light of these challenges, GAO has made numerous recommendations to IRS — some of which have not yet been implemented — such as developing and documenting a strategy that outlines how IRS will use data to update compliance approaches to help address the tax gap. Reducing the tax gap will also require targeted legislative actions. For example, expanding third-party information reporting could increase voluntary compliance and providing IRS with the authority to regulate paid tax return preparers could improve the accuracy of the tax returns they prepare.”


Representatives from the IRS also testified at the hearing. Dr. Benjamin Herndon, chief research and analytics officer at the IRS, discussed how the IRS comes up with its estimates of the tax gap, and why there hasn’t been one since 2016, covering tax years 2008 through 2010. He said the IRS plans to release an updated estimate later this year.


“In terms of what makes up the tax gap, the underreporting of business income by individual taxpayers — income of sole proprietors, farmers and those earning rental, royalty, partnership, and S Corporation income — is the largest contributor, accounting for $125 billion of the total $458 billion in the 2008-2010 period,” said Herndon. “The IRS believes that the lack of reliable and comprehensive reporting and withholding for business income received by individuals is the main reason for these findings. These statistics provide further confirmation that “visibility” of income sources and financial transactions is a significant contributor to increasing the compliance rates, and enhanced information reporting is one of the few means of sizably increasing the compliance rate. Business income reported on Form 1040s is a much lower-visibility income source because it is not often subject to the same information reporting and withholding requirements that exist for salary and wage income.”


Kenneth Wood, former deputy associate chief counsel at the IRS, also spoke at the hearing. He retired last August, but discussed how large multinational corporations can avoid paying taxes by using strategies such as transfer pricing. “The facts of each transaction are, typically, very complex, the economic analysis is difficult and not susceptible of precision, and the legal guidelines are somewhat blunt,” he said. “In short, the task of auditing the pricing of trillions of dollars of transactions, within the statute of limitations, is an extraordinarily heavy lift. And as budgets shrink and senior personnel with substantial transfer pricing experience retire and cannot be replaced, transfer pricing audits become more and more challenging, and tax revenues fall. An economic analysis from 2010 estimated that inappropriate transfer pricing was draining more than $28 billion annually from the Treasury. On the other side of the equation are large, well-advised multinational corporations that control the facts but resist responding to legitimate IRS inquiries in a timely manner in the hope that they can run out the clock before the IRS has fully developed its case. Given the tax dollars at risk, these taxpayers spend tens of millions of dollars annually on tax litigation. If you are curious, I suggest you review the financial statements of taxpayers that have recently litigated, or are litigating, a large transfer pricing case. These expenditures support not just a substantive defense of their tax position but also efforts to undermine the IRS’s ability to develop its case. It is hardball litigation by counsel zealously representing their clients, and they have far larger budgets than the IRS. Taxpayers are understandably willing to spend millions to save billions. While the IRS has excellent, very hard working litigators, the organization has far fewer resources than taxpayers to devote to these cases.”




Trump’s ‘abnormal’ interest income two decades ago came tax-free

By Lynnley Browning


President Donald Trump earned a large amount of interest income two decades ago that was used in tandem with then-burgeoning losses to help him avoid paying federal taxes, according to newly published tax details.


While it’s unknown how Trump earned $52.9 million in taxable interest income in 1989, it was a curiously outsize amount of revenue — and a key way he avoided taxes, tax experts say.


Under Internal Revenue Service rules, the interest income could have helped Trump zero out his tax bills that year, when his old business losses still hung around and new losses began mounting.


Where that sizable amount of interest income in 1989 came from is unclear, but what it allowed him to do is clear – absorb some of his previous business losses, known as net operating losses or NOLs, to help zero out his federal income tax bill. Such NOLs can be used to lower or eliminate federal tax bills only when there’s enough taxable income — in this case, the interest income — to partly or fully absorb them.


The New York Times obtained Trump’s IRS transcript that included figures from his federal 1040 tax forms from 1985 to 1994 from someone who had legal access to it. The Timespublished a report about his finances on Tuesday, showing that he lost $1.17 billion over 10 years on failed business deals.


The spike in interest income is notable because Trump reported receiving only a fraction of that interest income in previous years. By contrast, he reported $11.8 million in interest income in 1988. In 1987, Trump reported an even smaller $5.5 million, and in 1986, only $460,566, the Times said.


“It’s abnormal,” said Julie Welch, a tax partner and accountant at Meara Welch Browne in Leawood, Kansas. It’s also evidence of a savvy tax move, she added. “That’s good planning.”


Trump, a real estate and branding businessman, has made no secret of his love of tax avoidance, boasting that it makes him “smart.” He’s under increasing congressional and state pressure to release his tax returns, which he has refused to do.


On Wednesday, Trump tweeted that real estate developers “always wanted to show losses for tax purposes.”

Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ...... would get it by building, or even buying. You always wanted to show losses for tax purposes....almost all real estate developers did - and often re-negotiate with banks, it was sport. Additionally, the very old information put out is a highly inaccurate Fake News hit job!


During the period covered by the documents examined by the Times, Trump’s businesses generated huge operating losses, and his hotel and casino properties were eligible for large depreciation write-offs that caused him to pay federal taxes in only two years between 1985 and 1994.


“Losses are valuable — if you have a billion of losses, you can soak up a billion of income without paying taxes,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. But someone has to have enough taxable income to use them in a given year.


Portions of losses that go unused because there isn’t enough income can be used to lower tax bills on prior and future income, making them a potentially lucrative piggy bank. In 1989, the losses could be carried forward 15 years and back three years; now it’s 20 years forward and two years back.


It’s not known when Trump’s previous losses in the years leading up through 1989 were set to expire.


But his hefty interest income in 1989 would likely have been useful for 1985, when he reported losses of $46.1 million from his casinos, hotels and retail space in apartment buildings, and for 1986, when his business losses were $68.7 million, according to the Times. By 1990 and 1991, his business losses were more than $250 million each year, the newspaper said.


The sharp increase in interest income may have signaled a need to generate income to soak up losses before they expired.


“People will sometimes go out of their way to generate income, because they have expiring NOLs and they want to absorb them,” according to H. David Rosenbloom, a tax partner at Caplin & Drysdale. “People go through hoops” in order to avoid losing that tax benefit,” he said. “There’s nothing illegal about it.”


Brian Galle, a tax law professor at Georgetown University, tweeted that “Interest income is typical of efforts to shift taxable income from hi to low tax jurisdiction.”


One thing appears clear, Welch said: “it’s unlikely he had a big outside investment” like bonds, because his interest income before 1989 was so much lower.


Either way, the interest income that Trump reported helped fuel tax write-offs that likely relied on the paper of a federal return, as opposed to real economic losses, to create tax benefits.


“I’m skeptical that” the new details “demonstrate real economic losses, as opposed to tax losses on paper, Rosenbloom said. “There’s plenty of that in the real estate industry.”




Trump says $1.17B losses were ‘sport,’ sound tax policy

By Terrence Dopp and Laura Davison


President Donald Trump defended his real estate tax strategy saying his business was “entitled” to write-offs following a New York Times investigation that showed he reported losses of $1.17 billion between 1985 and 1994.


“You always wanted to show losses for tax purposes,” Trump tweeted on Wednesday. “Almost all real estate developers did - and often re-negotiate with banks, it was sport."

The president was responding to a Times report showing his businesses generated huge losses and his hotel and casino properties were eligible for large depreciation write-offs that meant he paid taxes for only two years during that period. The report was based on tax records the newspaper said it had obtained.


Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ......


Without disputing the substance of the newspaper’s findings, Trump called it "very old information put out is a highly inaccurate Fake News hit job!"


Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ...... would get it by building, or even buying. You always wanted to show losses for tax purposes....almost all real estate developers did - and often re-negotiate with banks, it was sport. Additionally, the very old information put out is a highly inaccurate Fake News hit job!


Trump whittled down his tax payments using the same parts of the U.S. tax code that he’s criticized other businesses for taking advantage of since he entered politics. He’s complained that large corporations such as — led by the world’s richest man, Jeff Bezos — are shirking their tax responsibilities.


Trump’s tax information shows he only paid taxes during two years during the decade the Times examined. He faced a liability those years — for a combined total of about $1.5 million in taxes — because of the alternative minimum tax, a backstop that prevents the wealthy from claiming so many tax credits and deductions that they don’t pay any tax.


Senator Chris Coons, a Democrat from Delaware, said the report showed Trump “failed spectacularly” in business during that time frame.


“How was he bailed out?” Coons said on CNN. “That’s really the question worth asking.”


New reports of Trump’s low tax bills are fueling House Democrats’ anger at not being able to view his more recent tax returns. The Times said their reporting was based on figures from his tax transcripts and the figures from his tax returns, but not the returns themselves.


Speaker Nancy Pelosi said the new information wasn’t enough.


"It tells me nothing," Pelosi of California said Wednesday at an event in Washington, adding, "It does tell us it would be useful to see his tax returns."


Trump broke with more than 40 years of tradition by refusing to release his tax returns before the 2016 election. Last month, House Ways and Means Chairman Richard Neal requested that the IRS release Trump’s personal and business tax returns, but Treasury Secretary Steven Mnuchin on Monday refused.


Neal, a Massachusetts Democrat, is currently consulting with legal counsel on how to proceed, and the clash is likely to turn into a protracted legal battle.


Trump sold himself to voters as a master deal-maker who could bring the same success to the country as he says he did to his businesses. The Times report underscores the steep losses and frequent failures of his deals. While he never personally filed for bankruptcy, his businesses sought bankruptcy protection four times.




Trump used same tax breaks as Amazon to obliterate his IRS bill

By Laura Davison


President Donald Trump complains that large corporations, such as Inc., are shirking their tax responsibilities. Yet for at least a decade, Trump paid none or very little in federal income taxes by exploiting some of the same generous tax breaks that the online retail giant and others have used to reduce IRS bills.


Trump’s businesses generated huge losses, and his hotel and casino properties were eligible for large depreciation write-offs that meant he paid taxes for only two years between 1985 and 1994, according to tax records obtained by the New York Times. Trump, then a real estate developer, racked up $1.17 billion worth of losses in that time, according to the documents.


Trump defended his real estate business tax strategy Wednesday following publication of the Times report, saying he was “entitled” to the benefits.


Real estate developers in the 1980’s & 1990’s, more than 30 years ago, were entitled to massive write offs and depreciation which would, if one was actively building, show losses and tax losses in almost all cases. Much was non monetary. Sometimes considered “tax shelter,” ......


Before he ran for president, Trump complained that corporate America isn’t paying enough in taxes. He first tweeted in 2015 “if @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag.” Since then, he’s sent at least a dozen tweets critical of how little the company pays in taxes.



If @amazon ever had to pay fair taxes, its stock would crash and it would crumble like a paper bag. The @washingtonpost scam is saving it!


Trump used parts of the U.S. tax code to whittle down his tax bill to nothing for several years, the same sections that Amazon has used to pay no federal income taxes for the past two years. The company — led by the world’s richest man, Jeff Bezos — has been able to get a tax refund for the past two years despite turning a profit. It tapped losses that occurred before it was profitable, for write-offs from building warehouses and distribution centers, in addition to other legal tax breaks.


Trump’s tax information shows he only paid taxes during two years during the decade the Times examined, according to the newspaper’s report. He faced a liability those years — for a combined total of about $1.5 million in taxes — because of the alternative minimum tax, a backstop that prevents the wealthy from claiming so many tax credits and deductions that they don’t pay any tax.


Trump’s 2017 tax overhaul eliminated the alternative minimum tax for corporations, but the Trump Organization is made up of a series of pass-throughs and was not affected by that change. The AMT for individuals was largely scaled back so it hits far fewer taxpayers.


Trump has boasted that paying no federal taxes makes him “smart.” He emphasized his business acumen in the 2016 presidential campaign and during his presidency. However, according to the Times report, Trump’s losses during 1990 and 1991, which totaled $250 million a year, were more than double those of the nearest individual taxpayer in the IRS’s database of high-income filers.


Deal Maker

New reports of Trump’s low tax bills are likely to fuel House Democrats’ anger at not being able to view his more recent tax returns. The Times said their reporting was based on figures from his tax transcripts and the figures from his tax returns, but not the returns themselves.


Trump broke with more than 40 years of tradition by refusing to release his tax returns before the 2016 election. Last month, House Ways and Means Chairman Richard Neal requested that the IRS release Trump’s personal and business tax returns, but Treasury Secretary Steven Mnuchin on Monday refused.


Neal, a Massachusetts Democrat, is currently consulting with legal counsel on how to proceed, and the clash is likely to turn into a protracted legal battle.


Trump sold himself to voters as a master deal-maker who could bring the same success to the country as he says he did to his businesses. The Times report underscores the steep losses and frequent failures of his deals. While he never personally filed for bankruptcy, his businesses sought bankruptcy protection four times.


Trump has defended his refusal to release his tax returns, but saying people “don’t care” about them and “wouldn’t understand” what they contain anyway. About 51 percent of voters said they supported Democrats efforts to obtain the tax returns, according to an April Morning Consult/Politico poll.




Trump had losses of $1.17B over a decade, NYT reports

By Shannon Pettypiece



President Donald Trump, who won the presidency in part on his image as a successful business mogul, lost $1.17 billion over 10 years on failed business deals, according to tax records obtained by the New York Times.


The losses, in the 1980s and 1990s, were greater than those reported by nearly any other American taxpayer during that period, according to Internal Revenue Service data the Timessaid it had reviewed. In 1990 and 1991, according to the Times report, Trump’s loses of $250 million a year were more than double those of the nearest taxpayer the IRS collected information on.


Democrats in Congress have been battling for the release of the president’s more recent returns, a clash that may likely end in court. Trump sold himself to voters as a master dealmaker, who could bring the same success to the country as he did to his businesses. While he never personally filed for bankruptcy, his businesses sought bankruptcy protection four times.


The Times said it did not obtain the actual tax returns, but instead received Trump’s IRS tax transcripts that included figures from his federal 1040 tax form from someone who had legal access to it. The Times said it was able to verify some of the figures by cross referencing them to other documents they had obtained.


The losses cover Trump’s taxes from 1985 to 1994. The losses began with $46.1 million in 1985 from casinos, hotels and retail space, and grew year after year, the Times reported. The returns also show how Trump’s primary sources of income changed each year from stock market earnings — in part from boosting stock prices by suggesting he would take over a company — to an unexplained $52.9 million gain in interest income.


Yet the income was offset each year by losses, which were so great that Trump would have been able to avoid paying income taxes for eight of the 10 years.


In a statement to the Times, Charles Harder, a lawyer for Trump, said that the tax information was “demonstrably false,” and that the paper’s statements “about the president’s tax returns and business from 30 years ago are highly inaccurate.”


In an additional statement to the Times he said “I.R.S. transcripts, particularly before the days of electronic filing, are notoriously inaccurate” and “would not be able to provide a reasonable picture of any taxpayer’s return,” the paper reported.


The White House did not respond to a request for comment.


On Monday, Treasury Secretary Steven Mnuchin refused to release Trump’s personal and business tax returns from the past six years, setting up what could become one of the biggest legal showdowns between the president and a Congress seeking to investigate him.


Democrats, citing a section of the tax code from 1924, say the law is on their side. The law allows the chairmen of the House Ways and Means and Senate Finance committees and the Joint Committee on Taxation to request the tax returns of any taxpayer and that the Treasury secretary “shall” provide them.


The Times has previously reported on parts of Trump’s tax returns from his 1995 filings after receiving some of the pages in the mail. They showed that Trump had reported a loss of $915.7 million.


Trump’s financial troubles over the period examined by the Times have been well documented with his companies having sought bankruptcy protection in 1991, 1992, 2004 and 2009.






Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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