In a much-anticipated ruling that confounded the expectations of many court watchers, the U.S. Supreme Court has given state and local governments the green light to impose sales taxes on out-of-state online sales. The 5-4 decision in South Dakota v. Wayfair, Inc. was met by cheers from brick-and-mortar retailers, who have long believed that the high court’s previous rulings on the issue disadvantaged them, as well as state governments that are eager to replenish their coffers.

The previous rulings

The Supreme Court’s holding in Wayfair overruled two of its precedents. In its 1967 ruling in National Bellas Hess v. Dept. of Revenue, the Court tackled a challenge to an Illinois tax that required out-of-state retailers to collect and remit taxes on sales made to consumers who purchased goods for use within the state.

That case involved a mail-order company. The high court found that, since the company’s only connection with customers in Illinois was by “common carrier” or the U.S. mail, it lacked the requisite minimum contacts with the state required by the Due Process and Commerce Clauses of the U.S. Constitution to impose taxes. It held that the state could require a retailer to collect a local use tax only if the retailer maintained a physical presence, such as retail outlets, solicitors or property in the jurisdiction.

Twenty-five years later, in Quill Corp. v. North Dakota, the Supreme Court reconsidered the so-called physical presence rule in another case involving mail-order sales. Although it overruled its earlier due process holding, it upheld the Commerce Clause holding. The Court based its ruling on the Commerce Clause principle that prohibits state taxes unless they apply to an activity with a “substantial nexus” — or connection — with the state.

Criticism of the physical presence rule

The rule, established in Bellas Hess and affirmed in Quill, has been the subject of extensive criticism. This has been particularly true in recent years as traditional stores have lost significant ground to online sellers. In 1992, the Court noted that mail-order sales in the United States totaled $180 billion, while in 2017 online retail sales were estimated at $453.5 billion. Online sales represented almost 9% of total U.S. retail sales last year.

This market dynamic is highlighted in the new case. As South Dakota argued in its petition for Supreme Court review:

Quill has grown only more doctrinally aberrant … But while its legal rationales have imploded with experience, its practical impacts have exploded with the rapid growth of online commerce. Today, States’ inability to effectively collect sales tax from Internet sellers imposes crushing harm on state treasuries and brick-and-mortar retailers alike.

Indeed, it’s been estimated that states lose $8 billion to $33 billion in annual sales tax revenues because of the physical presence rule. States with no income tax, such as South Dakota, have been especially hard hit. South Dakota’s losses are estimated at $48 million to $58 million annually.

The sales tax at issue

In response to the rise in online sales and the corresponding effect on sales tax collections, South Dakota enacted a law requiring out-of-state retailers that made at least 200 sales or sales totaling at least $100,000 in the state to collect and remit a 4.5% sales tax. The 2016 law also included a clause declaring an emergency in light of the need “for the support of state government and its existing public institutions …”

South Dakota subsequently sued several online retailers with no employees or real estate in the state. It sought a declaration that the sales tax was valid and applicable to the retailers, along with an injunction requiring the retailers to register for licenses to collect and remit the tax. A trial court dismissed the case before trial, and the State Supreme Court affirmed, citing its obligation to follow U.S. Supreme Court precedent, however persuasive the state’s arguments against the physical presence rule might prove.

The Supreme Court’s reasoning

The majority opinion — penned by Justice Kennedy but joined by the unusual mix of Justices Thomas, Ginsburg, Alito and Gorsuch — didn’t mince words. It described the physical presence rule as “unsound and incorrect.” According to the Court, the rule becomes further removed from economic reality every year.

Quill, the opinion said, creates market distortions. It puts local businesses and many interstate businesses with a physical presence at a competitive disadvantage compared with remote sellers that needn’t charge customers for taxes. Kennedy wrote that the earlier ruling “has come to serve as a judicially created tax shelter for businesses that decide to limit their physical presence and still sell their goods and services to a State’s consumers — something that has become easier and more prevalent as technology has advanced.”

In addition, the Court found that Quill treats economically identical actors differently for arbitrary reasons. A business with a few items of inventory in a small warehouse in a state is subject to the tax on all of its sales in the state, while a seller with a pervasive online presence but no physical presence isn’t subject to the same tax for the sales of the same items.

Ultimately, the Supreme Court concluded that the South Dakota tax satisfies the substantial nexus requirement. Such a nexus is established when the taxpayer “avails itself of the substantial privilege of carrying on business” in the jurisdiction. The quantity of business the law required to trigger the tax couldn’t occur unless a seller has availed itself of that substantial privilege.

Of course, as the Court acknowledged, the substantial nexus requirement isn’t the only principle in the Commerce Clause doctrine that can invalidate a state tax. The other principles weren’t argued in this case, but the high court observed that South Dakota’s tax system included several features that seem designed to prevent discrimination against or undue burdens on interstate commerce, such as a prohibition against retroactive application and a safe harbor for taxpayers who do only limited business in the state.

The impact

The significance of the Supreme Court’s ruling was felt almost immediately in the business world, with the share prices of major online retailers quickly dropping (even those that do collect and remit sales taxes). It’s not just the behemoths that could be affected, though.

The Court recognized that the burdens of nationwide sales tax collection could pose “legitimate concerns in some instances, particularly for small businesses that make a small volume of sales to customers in many States.” But, it said, reasonably priced software eventually may make it easier for small businesses to cope. Perhaps in response to this assertion, prices for shares in a company that makes a popular tax-processing software climbed after the Court released its opinion. The ruling also pointed out that, in this case, the law “affords small merchants a reasonable degree of protection,” such as annual sales thresholds.

Further, the Court noted, South Dakota is one of more than 20 states that are members of the Streamlined Sales and Use Tax Agreement (SSUTA). These states have adopted conforming legislation that provides uniform tax administration and definitions of taxable goods and services, simplified tax rate structures and other uniform rules.

What next?

Only about 15 states currently have sales tax laws similar to South Dakota’s, so it’s likely there will be a staggered imposition of sales tax collection and remittance responsibilities on online retailers. Other states may need to revise or enact legislation to meet the relevant constitutional tests — including, but not limited to, the substantial nexus requirement.

With the filing date for 2017 in the rearview mirror for most businesses and individuals, the last thing they probably want to think about is income taxes. Unfortunately, though, criminals who commit tax-related identity theft don’t work seasonally — they’re constantly devising and unleashing new schemes.

And even though the IRS has taken successful steps to reduce tax-related identity theft in 2017, it cautions taxpayers to stay alert for scams year round and especially right after the tax filing season ends.

What is tax-related identity theft?

According to the IRS, tax-related identity theft generally occurs when a thief uses a stolen Social Security number (SSN) to file a tax return claiming a fraudulent refund. The victimized taxpayer may not learn of the theft until he or she attempts to file a tax return and finds that a return has already been filed for that SSN. Alternatively, the taxpayer might discover the theft upon receipt of a letter from the IRS saying it has identified a suspicious return that uses the taxpayer’s SSN.

Thieves have devised a variety of methods to obtain the information they need to file a tax return under another person’s SSN. During the past several years, the IRS, Federal Trade Commission (FTC) and state tax agencies have issued warnings as new methods come to the forefront.

How does tax-related identity theft occur?

But filing fraudulent returns isn’t the only way that taxpayers are victimized. Scam artists are using multiple channels to conduct their tax-related identity theft schemes, including:

Phone schemes. This past April, less than 10 days after the tax return filing deadline, the IRS highlighted a new phone scam conducted by fraudsters who program their computers to display the phone number of the local IRS Taxpayer Assistance Center (TAC) on the taxpayer’s Caller ID. If the taxpayer questions the legitimacy of the caller’s demand for a tax payment, the caller directs him or her to IRS.gov to verify the local TAC phone number.

The perpetrator hangs up, calls back after a short period — again “spoofing” the TAC number — and resumes the demand for money. These scam artists generally require payment on a debit card, which allows them to directly access the victim’s bank account.

In another phone scheme, the criminals claim they’re calling from the IRS to verify tax return information. They tell taxpayers that the agency has received their returns and simply needs to confirm a few details to process them. The taxpayers are prompted to provide personal information such as an SSN and bank or credit card numbers.

Digital schemes. Emails that appear to be from the IRS are part of phishing schemes intended to trick the recipients into revealing sensitive information that can be used to steal their identities. The emails may seek information related to refunds, filing status, transcript orders or PIN information.

The scammers have developed twists on this approach, too. The emails might seem to come from an individual’s tax preparer and request information needed for an IRS filing. Or the information request could arrive via text messages. Whether by text or email, the communication states that “you are to update your IRS e-file immediately” and includes a link to a fake website that mirrors the official IRS site. Emails also could include links that cause the recipients to download malware that infects their computers and tracks their keystrokes or allows access to files stored on their computers.

Do businesses need to worry?

The short answer is yes — businesses have also been targeted by criminals intent on victimizing their employees or the businesses themselves.

For several years now, criminals have employed different spoofing techniques known as business email compromise (BEC) or business email spoofing (BES). They disguise an email to a company’s human resources or payroll department so it seems to come from an executive in the company. The email requests a list of all employees and their Forms W-2 — information that can be used to file returns in the employees’ names.

Scammers also are pursuing businesses’ Employer Identification Numbers (EINs). They then report false income and withholding and file for a refund in the companies’ names. Even worse for the companies, the IRS could go after them for payroll taxes reported as withheld but not remitted.

The IRS recently announced that it has seen a sharp increase in the number of fraudulent filings of certain business tax forms, including Schedule K-1 and those filed by corporations and partnerships. As a result, the IRS may ask businesses for additional information (such as the driver’s license numbers of owners) to help identify suspicious tax returns.

How does the IRS contact taxpayers?

The IRS has made it clear that it will not:

• Threaten to bring in law enforcement to have someone arrested for nonpayment of taxes,
• Revoke a driver’s license, business license or immigration status for nonpayment,
• Demand a specific payment method, such as a prepaid debit card, gift card or wire transfer,
• Request a debit or credit card number over the phone,
• Demand the payment of taxes without the opportunity to question or appeal the amount owed (the IRS usually mails a bill when a taxpayer owes taxes),
• Send unsolicited emails, texts or messages through social media channels suggesting taxpayers have refunds or need to update their accounts, or
• Request any sensitive information online.

The IRS will call or visit a home or business in only very limited circumstances. It might do so, for example, if a taxpayer has a severely overdue tax bill, to secure an employment tax payment, or to tour a business as part of an audit or a criminal investigation. But even in those special situations, the IRS generally will first send several notices by mail.

What can victims and targets do?

If you know or suspect you’ve fallen prey to tax-related identity theft, you’ll need to file IRS Form 14039, “Identity Theft Affidavit.” The IRS and FTC recently announced a joint project that allows people to report such theft to the IRS online through the FTC’s IdentityTheft.gov website. Remember, though, that filing the affidavit doesn’t eliminate the need to pay your taxes.

In addition, the FTC advises victims of all types of identity theft to file a complaint on its website and contact one of the three major credit bureaus (TransUnion, Experian and Equifax) to place a fraud alert on their credit records. You also should contact your financial institutions and close any financial or credit accounts opened or tampered with by identity thieves.

If you received, but didn’t fall for, a scam email, you should still report it. The IRS urges individuals who receive unsolicited emails purporting to come from the IRS to forward the messages to phishing@irs.gov before deleting.

Stay alert

Don’t make the mistake of letting your guard down because tax season has passed. If you receive a suspicious communication from the IRS or other taxing authority, contact us for confirmation of its validity and advice on how to proceed.

Home equity borrowers get good news from the IRS

Passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 has led to confusion over some of the changes to longstanding deductions, including the deduction for interest on home equity loans. In response, the IRS has issued a statement clarifying that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible under the TCJA — regardless of how the loan is labeled.

Previous provisions

Under prior tax law, taxpayers could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt couldn’t exceed the fair market value (FMV) of the home reduced by the debt used to acquire the home.

For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, which can be a house, condominium, cooperative, mobile home, house trailer or boat. The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers aren’t required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it’s rented.

In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.

The TCJA rules

The TCJA limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, a taxpayer can deduct interest only on mortgage debt of $750,000. The congressional conference report on the law stated that it also suspends the deduction for interest on home equity debt. And the actual bill includes the section caption “DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.” As a result, many people believed the TCJA eliminates the home equity loan interest deduction.

On February 21, the IRS issued a release (IR 2018-32) explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that aren’t used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest isn’t deductible if the loan proceeds are used for certain personal expenses, but it is if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.

Some examples from the IRS help show how the TCJA rules work:

Example 1: A taxpayer took out a $500,000 mortgage to buy a principal residence with an FMV of $800,000 in January 2018. The loan is secured by the residence. In February, he takes out a $250,000 home equity loan to pay for an addition to the home. Both loans are secured by the principal residence, and the total doesn’t exceed the value of the home.

The taxpayer can deduct all of the interest on both loans because the total loan amount doesn’t exceed $750,000. If he used the home equity loan proceeds to pay off student loans and credit card bills, though, the interest on that loan wouldn’t be deductible.

Example 2: The taxpayer from the previous example takes out the same mortgage in January. In February, he also takes out a $250,000 loan to buy a vacation home, securing the loan with that home. Because the total amount of both mortgages doesn’t exceed $750,000, he can deduct all of the interest paid on both mortgages. But, if he took out a $250,000 home equity loan on the principal home to buy the second home, the interest on the home equity loan wouldn’t be deductible.

Example 3: In January 2018, a taxpayer took out a $500,000 mortgage to buy a principal home, secured by the home. In February, she takes out a $500,000 loan to buy a vacation home, securing the loan with that home. Because the total amount of both mortgages exceeds $750,000, she can deduct only a percentage of the total interest she pays on them.

Stay tuned

The new IRS announcement highlights the fact that the nuances of the TCJA will take some time to shake out completely. We’ll keep you updated on the most significant new rules and guidance as they emerge.

New budget agreement brings additional tax changes

The ink on the Tax Cuts and Jobs Act (TCJA), which swept in a tidal wave of changes to federal tax rules, had been dry for only seven weeks before Congress passed more legislation that could affect many taxpayers. The Bipartisan Budget Act of 2018 (BBA), which President Trump signed into law on February 9, 2018, contains several tax-related provisions that could reduce the amounts some taxpayers owe for the 2017 tax year.

Tax extenders

The BBA extends for one year a set of tax provisions, known as “extenders,” which expired at the end of 2016. Key provisions that have been extended include:

Exclusion of discharge of mortgage debt. The BBA extends homeowners’ ability to exclude from gross income mortgage debt on a principal residence that was forgiven in 2017 (for example, as a result of a foreclosure, short sale or loan modification). It also modifies the exclusion to make it apply to debt discharged later than 2017 but according to a written agreement that was entered into in 2017. Without the extended provision, taxpayers would have to pay income taxes on the amount of mortgage debt forgiven.

Deductibility of mortgage insurance premiums. Taxpayers can continue to treat mortgage insurance premiums as deductible interest. But this affects only taxpayers who itemize their deductions, and changes under the TCJA are expected to significantly reduce the number of taxpayers who do so. Further, the deduction phases out for taxpayers with adjusted gross income (AGI) of $100,000 to $110,000.

Deductibility of qualified tuition and related expenses. “Above-the-line” deductions are subtracted from a taxpayer’s gross income to calculate AGI. The BBA extends the above-the-line deduction for higher education expenses. Taxpayers needn’t itemize to take advantage of the deduction, but it’s capped at $4,000 for individuals with AGI that doesn’t exceed $65,000 ($130,000 for joint filers) and $2,000 for individuals with AGI that doesn’t exceed $80,000 ($160,000 for joint filers).

Incentives for empowerment zones. Empowerment zones are located in economically distressed areas. The BBA extends through 2017 the tax incentives — including tax-exempt bonds, employment credits, increased expensing and certain gain exclusion — for certain businesses and employers to operate in empowerment zones.

Additional tax-related provisions

The BBA also contains several other provisions that could affect federal taxes, including those related to:

Estimated corporate tax payments. The BBA repeals a rule in the Trade Preferences Extension Act of 2015 regarding the payment of certain estimated corporate taxes. The rule would have required corporations with assets of at least $1 billion to increase the amount of the estimated taxes installment due in July, August or September of 2020 by 8%, with the next required installment (due in October, November or December of 2020) reduced accordingly.

Senior citizen tax returns. Beginning with their 2019 taxes, taxpayers age 65 or older should be able to file their federal income taxes on a new Form 1040SR. The BBA directs the IRS to develop a form that is as simple as Form 1040-EZ, Income Tax Return for Single and Joint Filers With No Dependents. It will allow reporting of Social Security and retirement distributions, interest and dividends, and certain capital gains and losses.

Natural disasters. The BBA provides tax relief for people affected by the 2017 California wildfires. That includes an employee retention tax credit and special rules regarding early distributions from retirement plans and deductions for personal casualty losses due to the fires. The BBA also extends similar tax relief that had previously been provided to eligible taxpayers in disaster areas hit by Hurricanes Harvey, Irma and Maria.

Whistleblower awards. Two amendments clarifying whistleblower rights made their way into the BBA. The first makes clear that whistleblowers awarded money under the Dodd-Frank Act and state False Claims Acts — not just under the Federal False Claims Act and federal tax laws — are entitled to an above-the-line tax deduction for their attorneys’ fees. This treatment prevents double taxation of the fees (first as part of the entire amount received by the whistleblower and again on the amount paid to the attorney).

The second amendment defines “collected proceeds” to include criminal fines and civil forfeitures. In some cases, the IRS has argued that the amount of proceeds — which determines the amount of IRS whistleblowers’ awards — was limited to proceeds collected under the Internal Revenue Code (for example, the tax cheat’s penalties and interest), thereby excluding the consideration of criminal fines and civil forfeitures from the awards.

What now?

The BBA’s inclusion of provisions applying retroactively to 2017 taxes is sure to cause some confusion, particularly for those taxpayers who have already filed their tax returns. The IRS has indicated that it’s reviewing the BBA and plans to provide additional information as quickly as possible. Taxpayers whose returns are filed will likely need to file amended returns to take advantage of the benefits described above, but the IRS could provide an alternative solution. Please contact us with any questions.

In the wake of passage of the Tax Cuts and Jobs Act (TCJA) late last year, the IRS has taken one of the first critical steps to institute the law’s overhaul of the federal income tax regime. The IRS has released updated withholding tables that indicate how much employers should hold back from their employees’ paychecks to satisfy workers’ tax obligations. The new tables may provide the correct amount of tax withholding for individuals with simple tax situations, but they’ll likely cause other taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA.

New withholding tables

The revised IRS withholding tables reflect the TCJA’s increase in the standard deduction, suspension of personal exemptions and changes in tax rates and brackets.

The law roughly doubles the 2017 standard deduction amounts to $12,000 for single filers and $24,000 for joint filers. It also temporarily eliminates personal exemptions, which taxpayers previously could claim for themselves, their spouses and any dependents. (The personal exemption amount for each such individual was $4,050 in 2017.) And the TCJA adjusts the taxable income thresholds and tax rates for seven income tax brackets.

Employers and payroll services use the withholding tables to determine the amount to withhold from employees’ paychecks in light of their wages, marital status and number of withholding allowances. Employees provide this information on their Forms W-4.

The new withholding tables are designed to work with the Forms W-4 that employers already have on file for their employees. In other words, employees don’t need to complete any new forms or take any other action at this time.

Employers, on the other hand, must move to incorporate the new tables into their payroll systems as soon as possible — and no later than February 15, 2018. They should continue to use the 2017 withholding tables until they adopt the new figures.

A big caveat

The IRS expects that many employees will see increases in their paychecks after the new tables are instituted in February, but it’s possible that some taxpayers could find themselves unexpectedly slammed with bigger income tax bills when it comes time to file their 2018 tax returns. That’s because, in addition to cutting tax rates, the TCJA eliminates or restricts many of the popular tax deductions those taxpayers have claimed on their returns in past years.

For example, beginning in 2018, taxpayers who itemize can claim a deduction of no more than $10,000 for the aggregate of state and local property taxes and income or sales taxes. These taxpayers also can deduct mortgage interest on debt of only $750,000 ($1 million for mortgage debt incurred before December 15, 2017) and can’t deduct any interest on home equity debt, even if the debt existed before the TCJA was enacted. The higher standard deduction and expansion of family tax credits may offset the loss of these and other deductions — as well as personal exemptions — but taxpayers won’t know for certain until they actually prepare their 2018 returns in 2019.

The IRS itself cautions that people with “more complicated tax situations” face the possibility of having their income taxes underwithheld. If you itemize your deductions, are married and you and your spouse have multiple jobs or if you have more than one job per year, you should review your tax situation and adjust your withholding allowances as appropriate. Note that it’ll be up to taxpayers to alert their employers of the need to make adjustments to avoid the under- or overwithholding of taxes from their paychecks.

The IRS is updating its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations and expects the new calculator to be available by the end of February. The calculator will reflect changes in available itemized deductions, the increased child tax credit, the new dependent credit and repeal of dependent exemptions.

Beyond income taxes

Of course, paychecks also are subject to withholding for non-income taxes. Specifically, wages are subject to withholding for Social Security and Medicare taxes (known as FICA taxes), too.

For 2018, the employee’s share of the Social Security tax is 6.2% of the first $128,400 of taxable earnings. The employee share of the Medicare tax is 1.45% of all taxable earnings. Taxpayers with taxable earnings of more than $200,000 for individuals or $250,000 for couples also are subject to a Medicare surtax of 0.9%.

Better safe than sorry

If you’re subject to withholding, you’d be wise to check your situation by consulting with your tax advisor or by using the revised IRS withholding calculator once it becomes available. However, those who rely solely on the new withholding tables run the risk of dramatically under- or overwithholding on their taxes. At best, that means they extend the federal government no-interest loans of their hard-earned income; at worst, they could end up on the hook for far greater taxes — plus penalties — when they file their 2018 tax returns. We can help you plan now for all of the changes in the new tax law.

The IRS could face “catastrophic” technology breakdowns that would delay refunds for 100 million taxpayers if Congress approves additional cuts in the agency’s budget, the departing commissioner, John Koskinen, warned Monday.

The Internal Revenue Service also could face a decline in voluntary tax compliance. And it could confront difficulty adjusting its electronic systems to handle tax reforms being discussed by Congress and the Trump administration, he said.

Koskinen, a lightning rod for Capitol Hill criticism and even an impeachment target during his four-year tenure, used his final news conference to issue don’t-say-you-were-never-warned predictions about the potential impact of deep cuts in the IRS’s budget and personnel.

Approximately 64% of the tax agency’s information technology hardware systems “are aged and out of warranty,” said Koskinen. Roughly 22% of the IRS’s software products are “two or more releases behind the industry’s standard, he said. As a result, a technology breakdown “is not a question of whether, simply a question of when,” he warned.

“If this failure were to occur during a filing season, we could be looking at a lengthy interruption in processing returns and issuing refunds,” Koskinen said. “This could have a devastating effect on more than 100 million taxpayers waiting on their refunds, as well as the nation’s economy, which sees some $275 billion in refunds each winter and spring.”

Budget cuts similarly have removed about 20,000 full-time IRS employees since 2010, including 7,300 key enforcement workers, Koskinen said. The tax agency audited fewer than 935,000 individual tax returns in the 2017 fiscal year, the lowest number in 14 years, he said.

Moreover, the number of tax cases recommended for prosecution for non-payment claims or other issues is 36% below the 2010 total, he said.

“If people think that many others are not paying their fair share or that they’re not going to get caught if they cheat … our voluntary compliance system will be put at risk,” Koskinen said. “A 1% drop in the compliance rate translates into a (federal government) revenue loss of over $30 billion every year.”

Although IRS staffers are stretched with multiple missions, they’re prepared to make any changes required by the tax reform debates on Capitol Hill, he said. However, rolling out those changes quickly could be difficult if the provisions are made retroactive to the 2018 tax filing year, he said.

Saying, “I’m blaming Congress,” Koskinen vented about the budget cuts as he prepares to make way on Nov. 13 for interim IRS director David Kautter, currently the Department of the Treasury’s assistant secretary for tax policy.

Some members of Congress have returned the sentiment as they trimmed the agency’s   budget. Capitol Hill conservatives accused Koskinen of improperly stymieing investigations of the IRS’s handling of the Tea Party and other conservative groups that had sought tax-exempt status. He denied the charges, and successfully outlasted impeachment calls.

“I’m hopeful that in the future the IRS and Congress can have a more rational and reasonable discussion about the resources the agency needs to meet its very critical responsibilities,” Koskinen said.

Source: USA Today 1/10/18

Many of you are concerned about how to deal with the changes the new tax bill, when finished and signed into law by the president, will bring. Here are some planning points, based on what we know now. As you explore these ideas, mostly you will find they contain a common and time-tested theme: where possible, defer income and accelerate the payment of deductible expenses. The reason for relying on this oldest of strategies is because ordinary income tax rates should be lower next year and many expenses will either no longer be deductible or will be less valuable in light of higher standard deductions in 2018.

1. Delay year-end bonuses or other compensation. Many employees cannot control the timing of compensation, but it never hurts to ask. Where shifting income from 2017 to 2018 is possible, lower marginal tax rates should apply in 2018.
2. Maximize retirement deferrals. Be sure to fully fund your 401(k) and/or IRA to further reduce gross income for 2017. We’ll discuss during tax season fully funding 2017 SEPs and other retirement accounts that can be funded up to April 15.
3. Business owners and consultants should delay billing. It isn’t proper to simply delay depositing checks received before year-end, but you generally won’t be paid for amounts you haven’t billed. Shift that mid- to late-December billing out until January 1.
4. Prepay state income tax. This deduction will be eliminated beginning in 2018, so pay the fourth quarter estimate that is dated January 2018 by December 31, 2017. This strategy, however, requires that you know your status regarding alternative minimum tax (AMT). If you will be subject to AMT in 2017, it is likely that prepaying your state taxes will not reduce your 2017 taxes. In that case, with no benefit in either year, it makes better financial sense to make the payment later.
5. Prepay property taxes. The deduction for property taxes is likely to be limited to $10,000 beginning in 2018. To the extent that you already have an assessment that isn’t due until after the first of next year, pay it by December 31. For taxpayers with high property tax bills and other large deductions such as mortgage interest and contributions, accelerating the 2018 property tax payment into 2017 may save a deduction due to disappear next year. Mid-range taxpayers may need a projection to see if this makes sense. And here again, the strategy won’t work for those in AMT in 2017.

Example. Sharon and Vern owe $12,000 in property taxes annually in two installments. They also pay $15,000 mortgage interest and donate $3,000 to charity. If they prepay in 2017 $6,000 property tax due in 2018, their itemized deductions will be $36,000 ($12,000 + $6,000 + $15,000 + $3,000). If they do this for 2018, they will only have $24,000 of deductions, ($6,000 + $15,000 + $3,000) the amount of the new 2018 standard deduction. If they don’t prepay, they will lose the benefit of $2,000 because they can only deduct a maximum of $10,000 property tax in 2018. With prepay, total two-year deductions are $60,000. Without prepay, total two-year deductions are $58,000.

6. Bunching strategies. With the standard deductions doubling in 2018, lower itemizers will need to begin to incorporate strategies to bunch deductible expenses every other year to “pop up” over the standard deduction and preserve tax benefits. In this case, you might warn your favorite charities as you contribute this year-end that your next contribution might not occur until January 2019. In that way, you can make double contributions at the beginning and end of 2019 to achieve deductions above the standard deduction that year.
7. Make donations directly from IRA. If you are 70½ or older but your donations do not bring you over the new higher standard deduction, make those donations directly from your IRA as a custodial transfer.
8. Delay business asset acquisition. First-year bonus depreciation for brand new assets will be 100% in 2018 (up from 50% in 2017). You may want to delay capital expenditures to take advantage of the more complete write-off on the acquisition.
9. Complete trade-ins of business equipment, machinery, and autos before year-end. Section 1031 like-kind exchanges will only be available on real property beginning in 2018. If you have other business assets with low or no basis that you were considering trading in on the purchase of new, complete the transaction and place the new assets in service before year-end if possible.
10. Complete large capital gains sales and prepay the state tax. You may want to accelerate this type of income into 2017 as long as it is accompanied by the payment of state tax. With capital gains rates remaining virtually the same under the new law, the net after-tax result can be better this year.

Example. Karen is holding a significant amount of highly appreciated stock with very low cost basis. She can sell for $500,000 long-term capital gains. When she sells, she will owe $50,000 in state income tax. She also has $100,000 other ordinary income and $20,000 itemized deductions. If Karen sells and pays the state tax in 2017 instead of 2018, she will save approximately $2,000 in federal taxes.

May 19—2017 Tax Reform: Hopes for tax reform this year fade with Trump crisis.

As reported by Reuters, recent controversies enveloping President Donald Trump have left Republican lawmakers increasingly gloomy about the prospects for passing sweeping tax cuts, a rollback of the Affordable Care Act (ACA, Obamacare) and an ambitious infrastructure program this year. While House Speaker Paul Ryan (R-WI) recently urged his colleagues to “seize this moment” to pass tax reform, Senator Lindsey Graham (R-SC) told reporters that the legislative process had “pretty much ground to a halt” amid the tumult in Washington. Senate Majority Leader Mitch McConnell commented that “less drama from the White House” was needed to advance legislative priorities.

Document Title:May 19—2017 Tax Reform: Hopes for tax reform this year fade with Trump crisis.
Checkpoint Source:RIA Tax Watch
© 2017 Thomson Reuters/Tax & Accounting. All Rights Reserved.

“Spiders are filling out tax returns…
Spinning out webs of deductions and melodies…”

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