What does the Individual Mandate Mean to the IRS?

The Supreme Court’s recent decision to characterize the ObamaCare individual mandate as a tax will have significant repurcussions on efforts to simplify the tax code and the tax collection “business.”  In other words, it’s just going to complicate things.  That’s what happens when domestic policy initiatives are enacted through this nation’s tax laws.  And just as the tax code tends to be the “catch all” for implementing new policy, the IRS has consequently become that agency we constantly turn to for help with enforcing it.  It must be like achieving a new position at work with new responsibilities, but no pay raise!

Under Obama’s health care reform initiative, if you do not purchase health insurance, you will be charged a “tax” that will be enforced by none other than the Internal Revenue Service.  Besides adding complexity to the tax code, this new tax will be adding work to an already overburdened federal agency.  The IRS has been asked to take on new responsibilities before, so there should be no question as to whether or not it will be up for the task.  However, the costs will be staggering.  The IRS will have to implement new procedures, hire new staff, train old staff, and otherwise do what is necessary to enforce the new health care tax.

With more and more people piling up tax debts that they can’t afford to pay, the private tax relief firms may be the only ones that stand to benefit from all this.

Your 2012 and 2013 Federal Tax Returns Are At Risk!

Today, National Taxpayer Advocate Nina E. Olson reported to Congress the issues that the Taxpayer Advocate Service (TAS) will focus on during the upcoming fiscal year. Olson, expressed particular concern, among other issues, about the taxpayer impact of expired and expiring tax provisions.

“The continual enactment of significant tax law and extender provisions late in the year has led to IRS delays in handling millions of taxpayers’ returns and caused many taxpayers to underclaim benefits because they did not know what the law was … Because of the magnitude of these challenges and the uncertainty about such a large number of important provisions, the 2013 filing season is already at risk. The 2013 filing season is likely to pose problems for many (if not most) taxpayers and the IRS if Congress does not address the many provisions that have already expired or soon will.” Wrote Olson.

You may be asking, “How does this affect me?” Well, if Congress doesn’t act soon you may need to hire an experienced tax attorney to fight for tax relief. As my Federal Income Tax professor repeatedly ordered in law school: “Read on, read on, read on…”.

The following provisions are among the tax provisions that expired at the end of 2011:

  • The so-called “Alternative Minimum Tax patch.” As result, an estimated 27 million more taxpayers are subject to the Alternative Minimum Tax this year.
  • The deduction for state and local sales taxes.  About 11 million taxpayers claimed this deduction last year.
  • The deduction for mortgage insurance premiums.  About four million taxpayers recently claimed this deduction.
  • A provision allowing persons over age 70-1/2 to make tax-free withdrawals from their Individual Retirement Accounts (IRAs) to make charitable contributions.

According to the IRS website, Congress is likely to extend many of these and other expired provisions retroactive to January 1, 2012, but neither taxpayers nor the IRS know for sure what will happen and taxpayers, therefore, cannot make educated tax planning decisions now.

In addition to the provisions that expired at the end of tax year 2011, an even larger number of provisions are set to expire at the end of 2012. Such rules include the Bush-era cuts in marginal tax rates, reduced tax rates on dividends and long-term capital gains, various marriage penalty relief provisions, certain components of the child tax credit, the earned income tax credit, and the adoption credit, and the moratoria on the phase-outs of itemized deductions and personal exemptions.

Deal Finally Struck on Payroll Tax Cut Extension

It appears that Congress will be able to go home for Christmas after all. They finally struck a deal in Washington and narrowly avoided an automatic increase in the payroll tax rate.

House Republicans, under severe pressure from the White House, have agreed to the temporary two-month extension of the payroll tax cut that just days ago they killed, saying it was not good enough. Well, they are still saying it is not good enough, but they really had no choice but to pass this temporary measure.  The trade-off?  A conference committee will be appointed to convene in early January to work out a more permanent deal and the possibility of more permanent tax relief.

The stop-gap measure will still include the controversial Keystone pipeline project.

As part of this bill, unemployment benefits will also be extended for two months.

According to House Speaker John Boehner, the agreement should be voted on by unanimous consent before Christmas.

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Time is Running Out on the Payroll Tax Extension

Further payroll tax relief may have to wait.  Most Americans who have been following the story probably thought a two-month extension of the payroll tax cut was the best that could be arranged for now and it was a done deal.  In fact, after the Senate approved the measure on Saturday, they left Washington for their holiday break.  But not so fast — it still had to get past the House in today’s vote . . . and it didn’t.

Today the House voted 229-193 in opposition to the two-month extension.  This has the effect of kicking the measure back to the Senate, but Senate Majority Leader, Harry Reid, refuses to continue negotiations on a long-term deal until the House approves the preliminary one.  Here is the way he spins it:

I have been trying to negotiate a yearlong extension with Republicans for weeks, and I am happy to continue doing so as soon as the House of Representatives passes the bipartisan compromise to protect middle-class families, but not before then.

~ Senate Majority leader Harry Reid, D-Nev

If something isn’t done before the end of the year, then the payroll taxes will go up by 2 percentage points in January and nearly 2 million people could lose unemployment benefits.

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Long-term Payroll Tax Cut Decisions Postponed

The Senate approved a mere two-month extension of the payroll tax cut today, which still has to get through the House.

Senate approved a $33 billion package to extend unemployment benefits, extend a payroll tax holiday for millions of American workers and avoid cuts in payments to doctors who accept Medicare.  The measure is effective through February, when Congress will once again be locked in battle over whether and how to further extend those provisions.

~ Jennifer Steinhauer, New York Times

The agreement includes the Keystone XL legislation that Obama previously said he would veto. Today’s news is infuriating for many because it seems like despite all the battling and negotiating in Congress, nothing meaningful was accomplished.

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IRS Thinks Levy Power Needs More Teeth

One of the methods the IRS uses to collect past-due taxes is the levy. It has the authority to work with third-party financial institutions to seize cash from your bank account (bank levy) or with employers to intercept your paycheck (wage garnishment or wage levy).

Not all levies work the same. The levy on wages is “continuous.” In other words, once the levy is issued, the employer is instructed to submit payments to the IRS each pay period until the tax liability is paid in full or until the IRS otherwise releases the levy.  But the bank levy doesn’t work this way.  A bank levy affects only the funds that are in a specified account when the levy is issued.  If the IRS wishes to levy the account at a later date, it must submit another bank levy.  A levy on self-employment income works much like a bank levy in the sense that it is not continuous.  The levy on self-employment income is submitted to the third-party payor, and that person or company has a one-time obligation to turn over everything that is owed to the delinquent taxpayer.

The non-continuous nature of some levies is seen as an impediment to collections.  However, the IRS is trying to get this changed legislatively.

The Small Business/Self-Employed Division recognized the barriers the ROs [Revenue Officers] face when taking levy action and has taken some corrective action.  The Small Business/Self-Employed Division is preparing a legislative change proposal to expand continuous levies on additional income sources.  I.R.C. § 6331(e)  and § 6331(h) permit the continuous levy of salary and wages and certain other payments from the time of issuance until the levy is released.  The IRS has identified four additional categories of non-wage income that could be levied in a manner similar to wages and salary: non-employee compensation, rental income, royalties, and fishing boat proceeds.  These income sources totaled approximately $1.4 trillion for Tax Year 2009.  The proposal would expand the continuous levy authority to these additional categories of income and may increase revenue and assist taxpayers in becoming compliant through the use of additional collection options.

~ TIGTA Report #2012-30-007

It is beyond me how this change would “assist taxpayers.”  Taxpayers don’t need any “additional collection options”!  If this becomes law, it would be a major victory for the IRS.

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The Payroll Tax Cut Extension

There are always two sides to the tax relief coin. Heads: slash taxes. Tails: find a way to pay for it.

Both Republicans and Democrats agree that the payroll tax cut needs to be extended, but can’t agree on how to fund it, and unless they start making concessions soon, it will expire.

Republicans want to pay for the tax cut by cutting spending elsewhere. Specifically, they want to freeze federal workers’ pay through 2015 and reduce the government bureaucracy to the tune of 200,000 jobs.

Democrats want to tax the rich. Specifically, they want to make deeper cuts to the payroll tax and pay for it by imposing a 3.25 percent surtax on income exceeding $1 million.

Both of these measures have been put to votes and both have been killed. Still we are being told that the payroll tax cut will likely be extended in one form or another before Congress breaks for Christmas.

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How Far are We from Major Tax Reform?

Lawmakers are proposing drastic tax policy changes that could have a substantial impact on regular taxpaying Americans and their access to tax relief. According to tax lobbyist, Kenneth Kies, we could expect a major tax code revision by 2013 under the following conditions:

  1. Republicans would have to maintain control of the House
  2. The president would need to bring around conservative lawmakers
  3. Ideally it would be a Republican president with a more moderate tax reform agenda

Kies likes Newt Gingrich for this task. He does not see the time spent on tax reform now to be a waste of time, even what may have been done by the (failed) super committee. Some of what is done now could be laying the groundwork for real reform in the months and years to come.

Worst Idea of All Time

Think of all the bad ideas in America’s past: Smell-O-Vision, Leisure Suits, New Coke, Hydrogen-Filled Blimps, Barney, dare I say tax liens.  I guess the Land of the Free is a breeding ground for horrible ideas because the list is LONG.

And it should come as no surprise that the mother of all bad ideas was cooked up recently by a bone-headed politician. I speak of Rep. Jim Cooper’s proposal to let the IRS prepare our tax returns. Once you’re finished laughing hysterically, dry your eyes and try to compose yourself for a moment longer. But don’t think there’s any more to it than that. There is no “catch” here. He literally wants the IRS to “save us the time and money” expended in preparation of the returns ourselves. Nevermind the money we would lose by “asking the fox to watch the hen house.” The IRS would rob us blind!

The proposal may possibly be considered by the (as Newt Gingrich calls it) “maniacally stupid” debt reduction supercommittee. However, it seems unlikely that it will become part of their final proposal since its only proponents appear to be Rep. Cooper and Pres. Obama.