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Tuesday, September 27, 2016

Bipartisan Blockchain Caucus Launched in Congress

The Blockchain which is best known for the "guts" of how bitcoin transactions are verified, recorded and transacted, has uses beyond bitcoin. This decentralized system can be used to verify and process many types of transactions where two or more parties want verification of authenticity and to get information or transfer information or value.  IBM and others have been exploring this. The Federal Reserve and others held a conference on the topic in June (see CoinDesk story).

On September 26, the bipartisan Blockchain Caucus was launched led by Congressmen Mick Mulvaney (R-SC) and Jared Polis (D-CO). Per their 9/27 press release:

“Blockchain technology has the potential to revolutionize the financial services industry, the U.S. economy and the delivery of government services, and I am proud to be involved with this initiative,” Mulvaney said in a statement.
Blockchain is a vast public ledger that records every transaction of the digital currency Bitcoin and stores it in a global network so it can’t be interfered with. It’s constantly growing as more blocks with new recordings are added to it."
The press release doesn't mention tax, but tax is very relevant to this topic for a few reasons, including:
  • There are tax rules and issues in transacting business via a blockchain including sourcing and identifying the nature of the transactions.
  • Tax administration and compliance can be aided by this new technology.
  • Security is crucial so people are willing to do more types of transactions via this new technology.
Let's see what the caucus takes on in the next year.

What do you think?

For more on virtual currency and blockchain technology, visit my website on the topics.

Thursday, September 22, 2016

New tax filing security protocols

New Security Step – IR-2016-124 (9/22/16) – The IRS alerted people filing an extended return electronically for 2015 (due 10/17/16), that they likely would be asked to enter their AGI for 2014. The purpose is to help properly identify the taxpayer. The information release reminds people how to order a tax transcript from the IRS should they not have it.
Some states are using a similar system where they might ask for a driver’s license number or other identifying data that a thief might not have (although a thief might easily get someone’s driver’s license, such as because it is on their checks and cancelled checks were thrown out in the trash).
The Alabama Department of Revenue has a few programs to improve security and reduce identity theft. For example, taxpayers may register for a service where they are notified if a return is filed with their Social Security Number. The DOR also has a protection program that begins with the “ID confirmation quiz.” The state also highlights its programs in the Form 40 instruction booklet (although few people likely read this).
What more do you think the IRS and state tax agencies should do to protect the very sensitive information they have?

Wednesday, September 14, 2016

Does small revenue loss justify bad tax law? No

More on legislative efforts to give a tax break to winning Olympians(!) ...

See my 8/17/16 post for background.  This post got a lot of comments both here and on Tax Connections.

An update: H.R. 5946, U.S. Appreciation for Olympians and Paralympians Act, would modify §74 to exclude from income the value of medals and prize money received for competition in the Olympic or Paralympic Games. A similar bill, S. 2650, passed in the Senate on 7/12/16. Also see H.R. 2628, Tax Exemptions for American Medalists Act of 2015 (TEAM Act), applicable to awards received after 2014. S. 2650 and H.R. 5946 would be effective for awards received after 2015.

The Joint Committee on Taxation estimates that cost of this bill at $3 million over ten years (JCX-72-16 (9/13/16).

While $3 million cost over ten years is less than a rounding error in the federal budget, this does not justify enacting an unnecessary provision that violates many principles of good tax policy such as equity and neutrality.  Also, will this open the door to others seeking low cost changes to save them taxes? 

What do you think?

Saturday, September 10, 2016

California Prop 55 - Kicking the can down the road

California always has budget problems. In 2012, temporary tax increases were voted in to raise both the state sales tax rate and the top personal income tax rate. These put California at the top among state for high tax rates. These provisions expire soon, but budget problems remain. So, Prop 55 on the November 2016 ballot calls for extending the income tax rate increase.

Per the "findings" in Prop 55:

"Unless we act now to temporarily extend the current income tax rates on the wealthiest Californians, our public schools will soon face another devastating round of cuts due to lost revenue of billions of dollars a year. Public school funding was cut to the bone during the recession. Our schools and colleges are just starting to recover, and we should be trying to protect education funding instead of gutting it all over again. We can let the temporary sales tax increase expire to help working families, but this is not the time to be giving the wealthiest people in California a tax cut that they don’t need and that our schools can’t afford."

The continuing increased rates kick in on taxable income over $250,000.  Prop 55 would result in 9.3% not being the top personal income tax rate. Instead, brackets about $250,000 would include 10.3%, 11.3% and 12.3%.  With the longstanding mental health tax, the rate on income over $1 million would continue to be 13.3% through 2031. Yes, 2031!  That's a bit hard to picture.

How many people in California have income in this range? Using IRS zip code data for 2014, here are percentage for a few selected California zip codes based on $200,000 or more of AGI (after itemized deductions, fewer would have taxable income over $200,000 and the IRS doesn't report for taxable income over $250,000):

Fresno 93728           < 1%
Sacramento  95816    5%
San Jose 95125        19%
Torrance  90503         8%

This is not representative of course, but it is safe to say that less than 5% of California individual filers have to deal with the top rates.  And for the top temporary rate of 12.3% on taxable income over $500,000, less than 1% are affected.  Of course though, many in this range have a few million of annual income which is why the increased rates at the top can bring in millions of dollars.

I call this kicking the can down the road because instead of improving our tax system, we are applying a band-aid.  Here are a few things that would be better:

  • Lower individual tax rates and broaden the base by eliminating or cutting back on exclusions, deductions and credits. This also makes the system more equitable, transparent and simple.
  • Broaden the sales tax base and lower the rate. The California sales tax is still based on the 1930's economy when the tax was created. We just tax consumption in the form of tangible personal property and do not tax digital items, personal services, entertainment or utilities. Thus, the sales tax base continues to shrink as items, such as books and music, move from taxable tangible form to non-taxable digital form. This is crazy.  Also, some of the items we don't tax are ones that higher income taxpayer spend more money on such as food, utilities for their large homes, entertainment and personal services.
  • The state wants to reduce greenhouse gas emissions. Governor Brown just signed SB 32 and AB 197 calling for further reductions. A carbon tax or increased gasoline excise tax would help reduce emissions and generate revenue.
  • "Splitting the roll" on real property taxes to tax business property at a higher rate and/or modify the valuation approach. Prop 13 rates and valuation limits have inequitable effects among businesses that are not as relevant for businesses

What do you think?

Also see my California Tax Reform website.

Saturday, September 3, 2016

Tax Technology Scams

Technology has made tax compliance a lot simpler and more efficient. I believe at some point, tax compliance and payment will be a  just-in-time activity we can easily do from our smart phone or watch.

But, computer systems and networks need to be extremely secure due to the highly sensitive data and the thieves who work 24/7 to get the data. Just this week, the IRS alerted tax professionals of thieves and scammers trying to get control of practitioner computers to avail themselves of client tax data.

This is not the first warning from the IRS. A few times during 2016 the IRS warned tax professionals of scams aimed at obtaining their PTIN and client data. As part of the Security Summit, the IRS launched a campaign called – Protect Your Client: Protect Yourself, to bring greater awareness of threats and how to avoid them. One such scam involves thieves taking control of the practitioner’s computer and thus being able to obtain data from it.

The IRS encourages practitioners to review the security settings on their computers. In a 9/2/16 press release (IR-2016-119), the IRS recommends:

“In addition to activating security measures for tax software products, IRS urges all tax preparers to take the following steps:

  • Run a security “deep scan” to search for viruses and malware;
  •  Strengthen passwords for both computer access and software access; make sure your password is a minimum of eight digits (more is better) with a mix of numbers, letters and special characters and change them often;
  • Be alert for phishing scams: do not click on links or open attachments from unknown senders;
  • Educate all staff members about the dangers of phishing scams in the form of emails, texts and calls;
  • Review any software that your employees use to remotely access your network and/or your IT support vendor uses to remotely troubleshoot technical problems and support your systems. Remote access software is a potential target for bad actors to gain entry and take control of a machine.

In addition, the IRS recently issued instructions to tax professionals on how to monitor their PTIN activity.”

It's challenging enough for tax practitioners to work with the tax law and keep up to date with it. They also need to have a good foundation in technology and keep up to date to understand how to keep e-data secure and have appropriate technology set up for their tax practice.

What do you think?