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Sunday, April 23, 2017

Idaho Keeps Sales Tax On Groceries

Many states exempt groceries from sales tax per the premise that food is a necessity of life. This is a poorly targeted exemption though in terms of helping low-income taxpayers. Higher income individuals spend more on food so get the bulk of the tax savings. If instead, groceries were taxed, tax relief could be better targeted to the taxpayers who need it via a refundable income tax credit based on income.

Idaho subjects groceries to sales tax, but offers a grocery credit on the personal income tax returns. The only variation in the amount of the credit is that it is $120 per year rather than $100 if the individual is age 65 or older. So, it is poorly targeted and includes the out-dated assumption that senior citizens have financial needs (not all do).

Recent legislative activity in Idaho called for repeal of the sales tax on groceries. The governor vetoed this effort due to the revenue loss and the fact that a refundable income tax credit exists to reduce the burden of the tax.

I have more in this blog post at  Please take a look.

What do you think?  Should all states tax groceries and provide a refundable income tax credit based on need?  Many states already provide an Earned Income Tax credit, so low-income individuals are already filing in most states even if they owe no personal income tax.

Wednesday, April 19, 2017

Best Accounting Blogs of 2017

I know there are lots of best blog lists. I like them because I always find a few that I wasn't aware of and find of interest. just released several "top blog" lists including for small business, retail, e-commerce, real estate and accounting. I'm pleased to be on their list of Best Accounting Blogs.

Here is a link to all of their lists. I also like that they took an extra step of asking the bloggers to showcase a favorite recent post and what their blog is about.

What do you think?

Tuesday, April 18, 2017

Another example of 20th century tax compliance

Happy Tax Day!  One of the email alerts I received from the IRS today was Tax Tip 2017-48, Helpful Tips to Keep in Mind When Amending  Your Tax Return. I want to focus on tip #1 of the nine provided.  Here it is:

"File using paper form. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct the tax return. Taxpayers can’t file amended returns electronically. They can obtain the form on at any time. Mail the Form 1040X to the address listed in the form’s instructions."

So, two questions:
1. Why can't the IRS accept e-filed amended returns?
2. Why can't we just log onto our taxpayer account at the IRS and fix the error?

I think this might change once the IRS rolls out its Future State system for taxpayers (and perhaps practitioners too) to use. We'll see.

What do you think?

Thursday, April 13, 2017

Tax complexity and filing status

It doesn't seem that one's filing status should be confusing.  You're single or you're married. But, many people qualify for head-of-household status. That one is confusing because of its multi-faceted definition. 

The IRS offers an online questionnaire to help people figure out if they qualify for head-of-household status. For many years, the California Franchise Tax Board mailed questionnaires to individuals who claimed this status to let them know their status would be reviewed and provided information to help them confirm if they selected the proper status (click here for a sample letter). Starting in 2015, the FTB created a new form that must be completed and attached to the California income tax return if the head-of-household status is claimed (Form 3532).

The complexity of the head-of-household status and its interaction with other provisions is highlighted in a recent Tax Court decision. In Walker, TC Summary Opinion 2017-8 (2/13/17), the IRS denied the taxpayer’s claim of head-of-household status. W’s girlfriend and her son lived with him. The girlfriend’s son was not related to W and W had not adopted him. W provided over half the support for the son. On his return, W claimed a dependency exemption for the son, child tax credit, earned income tax credit and head-of-household filing status.

The court found that the son was W’s dependent because W provided over half of his support, and although not a relative, met Code §152(d)(2)(H) – “An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to section 7703, of the taxpayer) who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer’s household.”

The court denied W’s claim of a child credit under §24 because the girlfriend’s son was not W’s child. The court also denied W’s claim of the EITC under §32 because the son was not a “qualifying child” and W’s income was too high.

The court upheld W’s claiming of head-of-household status though. Per the court: “An individual qualifies as a head of household if, as relevant herein, he or she maintains as his or her home a household that constitutes the principal place of abode of a “qualifying child” as defined in section 152(c) or a dependent under section 151. Sec. 2(b)(1)(A).”

The court did not make any mention of Code §2(b)(3). Instead, the court only referred to §2(b)(A)(ii), finding that because the girlfriend’s son was W’s dependent, W qualified for head-of-household status. If the court had continued reading to §2(b)(3) it would have found that if a child is claimed as a dependent only because of Code §152(d)(2)(H) member of the household, the taxpayer doesn’t qualify for head-of-household status. Thus, the court reached an incorrect result, truly indicating the complexity of the head-of-household status.

Some tax reform proposals have called for repealing the head-of-household status as a simplification measure. For example, see the Tax Reform Act of 2014 (H.R. 1 of the 113rd Congress; also see Joint Committee on Taxation summary). 

What do you think?

Wednesday, April 5, 2017

AICPA and other groups call for improvements to IRS services

Years ago, the IRS had about 104,000 employees. Today it is around 83,000. Certainly, they don't need as many people to open envelopes due to e-filing, but this change results in a big drop in taxpayer services and audits. A common lament I hear from tax practitioners is the challenge of having to deal with notices from the IRS. It is difficult to get to talk to someone from the IRS who has the knowledge and file access needed to resolve the issue and you likely need to wait 30 minutes or more to talk to someone. 

Today, less than 1% of individual returns are examined (it's higher for higher income returns). Many of these exams are via correspondence.  This harms voluntary compliance, increases the tax gap and results in greater borrowing by the government and reduced spending. It is also unfair that some taxpayers will get away with both intentional and unintentional errors.

This is all very unfortunate.

In May 2015, the AICPA Council passed a resolution calling for -

"policy makers to create an objective, bi-partisan forum to engage stakeholders to expeditiously make recommendations that enable the Internal  Revenue Service to achieve its stated mission and to transform it into a modern-functioning, evolutionary, and respected federal agency for the 21st Century."

Earlier this year, the AICPA Tax Section called together several practitioner groups to work together on getting comments to Congress on the importance of improving IRS taxpayer services and offering various suggestions. One of the suggestions is to create a new unit to serve tax practitioners (about 60% of returns are prepared by a paid preparer).

I hope you'll take a look at the IRS transformation framework suggested (and 4/3/17 press release). As chair of the AICPA Tax Executive Committee I'm proud and pleased to have been part of this effort to highlight the need for a 21st century focus at the IRS and the need to be able to serve all stakeholders. Hopefully Congress will consider these suggestions as part of tax reform or any tax administration legislation.

What do you think?