Annette Nellen | TaxConnections

08 Mar 2022

Odd Tax Proposal Harms Tax Gap And Tax Transparency

H.R. 6937, Shifting Limits on Thresholds (SLOT) Act, is a bipartisan proposal to increase the information reporting threshold for slot machine winnings from $1,200 to $5,000 and adjust it for inflation. The sponsors note that the threshold has been $1,200 since 1977.

Per co-sponsor Rep. Anthony G. Brown, this proposal “is a necessary modernization of our tax code.”

Really? This proposal would harm our tax law by reducing gambling winnings that get reported (that is, it would increase the tax gap) and make many people think that such winnings are only taxable if they exceed $5,000.

Written by Annette Nellen | Posted in Shifting Limits On Thresholds Act (SLOTS)

24 Feb 2022

Gasoline Excise Tax Is Not Too High

The gasoline excise tax has been 18.4 cents per gallon since 1993. It is not adjusted for inflation and Congress has not changed its rate or its operation. This tax funds the Highway Trust Fund for road construction and maintenance. Costs for those projects continue to go up yet we don’t even adjust the gasoline excise tax for inflation. If we did, the tax would be 36 cents per gallon. If the tax were adjusted for how we fuel our cars, we would have a vehicle miles traveled tax (VMT) rather than one tied to buying gasoline. Today, many cars use the road where owners buy no gasoline.

In 2020, the gasoline excise tax generated about $24 billion of revenue. That is not a lot for a roughly $3.5 trillion federal budget. It is not near enough to fund all needed road projects. Occasionally, such as with the recent Infrastructure Investment and Jobs Act (PL 117-59; 11/15/21), funds need to be transferred from the General Fund to the Highway Trust Fund. The gasoline excise tax needs a fix, not repeal, even if temporary.

Written by Annette Nellen | Posted in Gasoline Tax • TaxConnections

15 Feb 2022

1040 Virtual Currency Confusion From Two Years Ago Is Still Confusing

Just posting a reminder today of an IRS website added two years ago on February 14, 2020 about virtual currency. Here is the link and here is the entire text:

“The IRS recognizes that the language on our page potentially caused concern for some taxpayers. We have changed the language in order to lessen any confusion. Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return.”

Prior to this 2020 post, the IRS website on virtual currency stated (thanks to the Wayback Machine for the information!):

“Virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin, Ether, Roblox, and V-bucks are a few examples of a convertible virtual currency.”

Today (since 2/14/20), that website reads:

Written by Annette Nellen | Posted in 1040 Virtual Currency Confusion

08 Feb 2022

TAX PROS: Dealing With IRS Form 1099 Errors – Input Desired

Tax season has started and by now (February 6) we should have our 1099s and W-2s and perhaps a few other reporting forms. We need to review them for accuracy, even forms from the IRS, such as Letter 6419 on the advance Child Tax Credit (see IRS Fact Sheet (FS-2022-5) on possible errors).

Some forms, such as Form 1099-C on cancellation of debt might be correct from the issuer’s tax requirements, but not correct for the recipient. For this 1099-C issue, I’ve blogged on it before (4/13/13 and 6/21/21). The 1099-C instructions also remind the recipient that their debt might not have really been discharged and they should not report the income until the year it has truly been discharged. The IRS doesn’t tell the recipient what to do with the 1099-C that isn’t reportable. That’s too bad because when the recipient figures out it isn’t reportable for the year printed on the 1099-C, the IRS doesn’t know.

Written by Annette Nellen | Posted in 1099 or W-2 • IRS Form 1099 Errors

25 Jan 2022

IRS FAQs Observations And Cautions

FAQs published by the IRS seem to increase exponentially each year. Just for the advance child tax credit of the American Rescue Plan Act (P.L. 117-2, 3/11/21), the IRS has over 80 FAQs and continue to update them even 10 months after enactment (but then, it is a multi-facited somewhat complex provision).

On October 15, 2021, the IRS announced a modification to its FAQ process for those issued on newly enacted legilation and emerging issues (IR-2021-202). Those FAQs will be released in a news release along with a Fact Sheet. Later updates should result in an updated Fact Sheet and we should be able to find any deleted or modified FAQs in prior fact sheets. As a news releases these FAQs are “authority” under Reg. 1.6662-4, although a low level of authority.

Fact Sheet FAQs will also include a disclaimer which includes:

“Because these FAQs have not been published in the Internal Revenue Bulletin, they will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer’s case, the law will control the taxpayer’s tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on these FAQs will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax.”

Written by Annette Nellen | Posted in IRS Frequently Asked Questions

12 Jan 2022

What’s Appropriate For Phaseout Rules And Refundable Credits?

Our federal tax law has several phaseout provisions designed to prevent higher income individuals from claiming certain credits and deductions. These phaseouts are mostly all different in terms of how income (“modified AGI”) is measured and the amount of MAGI. I think the different dollar amounts serve to prevent someone from having a very high marginal rate when they move one dollar past any single dollar amount for the entry into “high income.”

I have never understood the great variation in what items are included in MAGI. Usually the §911 foreign earned income exclusion which is $112,000 for 2022, is included. That makes sense as clearly that is income but excluded for other reasons. Rarely is tax-exempt interest income included in MAGI which is puzzling (it is included in measuring taxable social security benefits under §86). Also, exclusions are rarely added back such as gifts, inheritances and employer-provided health benefits, even though such amounts might be a significant amount of income.

Written by Annette Nellen | Posted in Phaseout Rules • Refundable Credits

04 Jan 2022

Suggestions For Improving U.S. State And Federal Tax Systems

What we might do differently in 2022? I offer a few suggestions for improving state and federal tax systems.

Modernize tax systems: Computing and paying our taxes should be as easy as e-commerce, online banking, and email. Income taxes should be a just-in-time system where we select software we want to use to compute our tax liability regularly and we pay in or receive any overpayment at least weekly. This will work for businesses if your software accurately computes your taxable income with each transaction you engage in. Also, if you need to amend a return, just log into your account and adjust your return.
Simplify!: Why does our federal tax system have over 100 special rules (see the Joint Committee on Taxation list here)?
Read More

Written by Annette Nellen | Posted in Federal And State Tax Suggestions

10 Dec 2021

More Overlooked But Needed Tax Reforms

Continuing with my list of reforms I think would help our tax system (see prior lists of 8/29/21 and 6/21/21), here are three more.

1. Consolidating education provisions further. Need to better identify purpose of these provisions and if their “cost” is appropriate and in line with direct spending such as Pell grants.
2. If higher education incentives are retained, be sure they also cover post-secondary trade schools and only for reasonable costs.
3. Make the IRC gender neutral – “his” is often used in the Code, sometimes even to describe a business (such as at §446(a)). Also, references to husband and wife should be changed to spouses.

Examples:

§213 – Medical, dental, etc., expenses. (a) Allowance of deduction. There shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the extent that such expenses exceed 7.5 percent of adjusted gross income.
§446(a) – General Rule. Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books.
§7701(a)(17) defines “husband and wife”.
§121(d)(1) – “If a husband and wife made a joint return for the taxable year of the sale or exchange of the property, ….”

Written by Annette Nellen | Posted in Tax Reform

01 Dec 2021

Digital Asset Reporting In H.R. 3684 Infrastructure Legislation

Late on November 5, 2021, the House passed (228-206) H.R. 3684, INVEST in America – the infrastructure bill that has received a lot of attention this year. It already passed in the Senate on August 10 (69-30).

One of the few tax items here and added for tax gap concerns is to expand the definition of broker under §6045 to require additional reporting for certain digital asset transactions. A few observations:

1. There are much bigger tax gap concerns than misreporting or non-reporting of digital asset transactions such as underreporting and non-reporting by some cash businesses.

2. The text added to §6045 requires actions by the IRS and is confusing and potentially too broad to be administrable (unless the IRS addresses that broadness). The issue is that “broker” is expanded to include: “any person who (for consideration) is responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person.” While the goal was likely to make virtual currency exchanges such as Coinbase and Kraken be brokers, the reach is potentially wider. For example, what about a company that provides various software for transfers or wallets?

Written by Annette Nellen | Posted in Digital Asset Reporting • HR 3684 Infrastructure Legislation

30 Nov 2021

Passthrough Entity SALT Cap Workaround Is Messy!

The $10,000 SALT cap enacted as part of the Tax Cuts and Jobs Act of 2017 has policy flaws. I have written about this a few times in recent years (7/4/19, 9/21/18) and in a few AICPA comment letters I signed as chair of the Tax Executive Committee (such as 11/10/17). The policy flaws include:

1. Why are C corps the only business entity allowed to fully deduct their state and local business taxes? State and local taxes are a normal expense of any business so should be deductible in computing taxable income. The reason non-C corp businesses (and their individual owners) are subject to the SALT cap even on state and local income taxes on business income is a 1944 law that made such taxes deductions from AGI rather than for AGI and Congress didn’t fix that in 2017 when it added the SALT cap. This should be fixed.

Written by Annette Nellen | Posted in Passthrough Entity SALT Cap

23 Nov 2021

November 23 – 100th Anniversary Of A Capital Gains Preference

Our federal income tax law did not have special treatment for capital gains until a much lower rate (12.5% rather than a top rate of 73%) was added by the Revenue Act of 1921 (P.L. 67-87; 11/23/1921).

So, November 23 marks 100 years of complexity, lots of discussion on why and how there should be any preference for capital gains, and fairly constant changes to these rules.

The Revenue Act of 1921 defined capital asset as “property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.”

The 1921 Act also

Written by Annette Nellen | Posted in Capital Gains • Tax Capital Gains

09 Nov 2021

Digital Asset Reporting In H.R. 3684 Infrastructure Legislation

1. There are much bigger tax gap concerns than misreporting or non-reporting of digital asset transactions such as underreporting and non-reporting by some cash businesses.

Written by Annette Nellen | Posted in Digital Asset Reporting • HR 3684 Infrastructure Legislation