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Wednesday, August 20, 2014

Textbook sales tax exemptions

New York and a few other states allow a sales tax exemption for college textbooks.  That may be too broad of a statement - the exemption is for a college student buying a textbook noted on his/her course syllabus or a list from the college.  It is not simple for the buyer or seller due to definitions, restrictions and recordkeeping.  I've got more on this at a recent SalesTaxSupport policy blog post - here.

While the exemption might sound like a great thing for students, and California often introduces proposals for such an exemption, it is not. There are better ways for legislatures to help college students including targeting relief to those who need it and not imposing extra work on third parties (booksellers) to handle the program.

What do you think?

Monday, August 18, 2014

Better identity theft efforts - S. 2736

On 7/31/14, Senators Wyden and Hatch proposed a comprehensive identity theft bill to reduce identity theft related to federal tax filings. This addresses a serious issue. Individuals should not have to worry that federal tax filings may lead to theft and costly use of their tax identification number. While tax reform bills have also included provisions to lessen identity theft, such proposals should not have to wait for a full tax reform bill to be enacted (which will likely take until at least 2016).  The IRS has also ramped up its efforts to reduce identify theft, but needs more assistance.

S. 2736, Tax Refund Theft Prevention Act of 2014, includes new rules for the following areas:
Sec. 2. Safe harbor for de minimis errors on information returns and payee statements - basically, no need to correct such a form if the error is $25 or less. Apparently, the goal it to reduce unnecessary filings, all of which increases the possibility of identity theft.

Sec. 3. Internet platform for Form 1099 filings.

Sec. 4. Requirement that electronically prepared paper returns include scannable code.

Sec. 5. Single point of contact for identity theft victims.

Sec. 6. Criminal penalty for misappropriating taxpayer identity in connection with tax fraud - up to $250,000 or 5 years in prison or both.

Sec. 7. Extend Internal Revenue Service authority to require truncated social security numbers on Form W-2 - modifies 6051(a)(2) by replacing "his social security number" with "an identifying number for the employee."

Sec. 8. Improvement in access to information in the National Directory of New Hires for tax administration purposes.

Sec. 9. Password system for prevention of identity theft tax fraud - calls upon Treasury to create a program where any individual may elect to obtain a "unique password" to include on his/her return. So, if a return with your social security number is filed, but without the password, it is not processed.

Sec. 10. Increased penalty for improper disclosure or use of information by preparers of returns.

Sec. 11. Increase electronic filing of returns.

Sec. 12. Increased real-time filing.

Sec. 13. Limitation on multiple individual income tax refunds to the same account.

Sec. 14. Identity verification required under due diligence rules - modifies the penalty under §6695(g) by adding at the end: "Such due diligence requirements shall include a requirement that such preparer verify (in  such manner and with such documentation as the Secretary shall provide) the identity of the taxpayer with respect to such return or claim for refund." This is the penalty that requires return preparer to take extra verifications when the return includes the EIT.

Sec. 15. Report on refund fraud - due from the IRS one year after enactment.

Per Senator Hatch's press release of 7/31/14:

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

“We have to better protect lawful taxpayers from this nightmare issue,” Wyden said.  “Earlier this year, I made it clear that taxpayer consumer protection must be at the heart of improving the American tax system.  This bill offers a comprehensive, common sense solution to a growing problem that will help prevent fraud and also provide assistance to those who have been victimized.”

A one-page summary of the bill from Senators Wyden and Hatch was also released.
What do you think?

Thursday, August 14, 2014

Test Your Tax Data Knowledge

Do you know how many individual tax returns are filed with the IRS each year? Do more returns have a marginal rate of 35% or 15%?  I've got a short article in today's AICPA Tax Insider with a ten question quiz about our federal individual income tax system.  This is the kind of data that can also help inform tax reform.  Give it a try. Good luck!

Wednesday, August 13, 2014

Even simple rules can get complicated

The U.S. Tax Court hears over 300 cases a year. Only about 12% are ones dealing with interpretation of the law ("regular" decisions).  The rest are memorandum and summary opinions. The summary opinions are the "small claims" part of Tax Court where the amount at stake has to be under $50,000 and the taxpayer waives any appeal rights.  Non-regular cases involve primarily interpretation of the facts.  But, many are quite interesting and can serve as reminders of rules we might not look at often, or reminders of questions to be asking clients ("due diligence"), and problems to avoid.

A recent TC Summary Opinion is a reminder of a few things:
  • Even figuring out filing status can be difficult.
  • Spouses should be careful of one spouse filing electronically and telling his/her spouse after the fact.
  • When a married couple file separately (rather than jointly), they lose some tax benefits, such as the Earned Income Tax Credit.  If they are contemplating divorce though, separate filing might be a good idea to avoid joint liability. Note that in California, if they are a very high income couple (over $1 million), filing separately might reduce an extra tax applicable in California. (If you have that much income, find a preparer knowledgeable about taxes for individuals such as yourself.)
The case summary and lessons learned are posted at CPE Link's blog (my guest post) - Bruce, TC Summary Opinion 2014-46.  I hope you take a look.

What do you think?

Friday, August 8, 2014

What about accountability? California solar energy property

Photo from EPA's Solar Energy website.
In June 2014, California enacted S 871 (Chapter 41, 6/20/14) . It "extends the sunset for a solar tax exemption for new active solar energy systems on new construction.  This bill extends the exemption through 2023-24, and extends the sunset through January 1, 2025." Under this rule, the construction or addition of an "active solar energy system" is excluded from being classified as "newly constructed." Thus, it will not increase the owner's property taxes. On August 8, 2014, the State Board of Equalization issued a letter to county assessors about the extension and the modified text of R&T Section 73. Guidelines from BOE on the exclusion can be found here (Nov. 2012).

The exemption is allowed per Section 2(c) of Article XIIIA of the California Constitution which allows the legislature to "provide that the term 'newly constructed' does not include an of the following: (1) The construction of addition of any active solar energy system." Apparently this special rule was added by the voters as Prop 7 in 1980 (per BOE memo of 9/23/13).

In 2013, California enacted three new tax incentives to encourage business activity in the state (California Competes income tax credit, New employment income tax credit, and a state sales tax exemption for certain R&D and manufacturing equipment). The first two, have significant accountability measures associated with them. For example, the California Competes credit is obtained through a competitive bidding process where the taxpayer must prove to a 5-member panel that they indeed will be increasing investment in California. The employment credit requires timely application to the Franchise Tax Board and an increase in the number of full-time employees compared to a base year. For both of these credits, the taxpayer's name and tax benefits are made public. These all have expiration dates as well. [See my chart below for a quick review of these provisions, as well as the links at the start of this paragraph.]

The property tax exclusion for active solar energy systems also had an accountability measure. That measure was the expiration date.  That is, when the exclusion approached its expiration date, it would be examined to see if it was achieving its stated purpose in a cost-efficient manner.

I can't find any data from BOE or the legislative analysis of S 871 on the data.  While common sense might tell us that the measure is appropriate because solar energy equipment should be encouraged to reduce reliance on other forms of energy, particularly those that use a lot of scarce water or generate greenhouse gas emissions, it would be good to see the data.

From the data, we ideally should be able to answer the following questions:
  • What is the cost of the exclusion relative to the cost of the solar energy equipment?
  • Has the exclusion caused an increase in installation of such equipment?
  • How does California's use of solar energy equipment compare to states with no incentives and those with other incentives?
  • Who is installing the solar energy equipment?  This data should be examined looking at industry, income levels, location, etc.?
  • Might a different incentive be better at broadening the use of solar energy equipment?
  • Why don't all property owners take advantage of this incentive?
Often, the necessary data to examine the effectiveness of a tax incentive is difficult to obtain. The enacting legislation should include a mandate that specific government agencies collect the data and funds should be allocated to be sure that happens. S. 871 does not include such a mandate and likely the earlier enacting bills also did not include the mandate.  Much of this data is likely fairly easy to obtain.

In February 2012, the legislature held a joint hearing on the subject of accountability of tax measures. I testified at that hearing and my testimony covered reasons for accountability measures and suggestions on how to implement them.

So, where is the data to support that the solar exclusion for property taxes is best meeting the goal, which I presume is to increase the use of solar energy in California?

What do you think?