Conference Committee Agrees on Details of Tax Legislation; Measure Likely to Pass Next Week

December 16th, 2017

The House and Senate conferees did indeed agree on tax ‘reform’ legislation. The bill will make great bedtime reading as it’s only 1,097 pages. The Tax Foundation has a great summary of the legislation. Here are some highlights; note that these provisions are in effect for the 2018 tax year:

– Seven tax brackets for individuals, ranging from 10% to 37%. Mostly, this will result in a decrease in taxes. However, the 35% tax bracket will now begin at $200,000 (single/Head of Household (HOH))/$400,000 Married Filing Jointly (MFJ); the 37% tax bracket begins at $500,000 single/HOH and $600,000 MFJ

– The standard deduction increases to $12,000 single/$18,000 HOH/$24,000 MFJ. However, personal exemptions are eliminated.

– Mortgage interest on home purchases remains deductible, but up to a limit of $750,000 of mortgage debt; however, equity debt is no longer deductible.

– State and local taxes, sales tax, and property tax deduction is limited to $10,000.

– The personal AMT is retained, but the AMT exemption is raised significantly.

– A single corporate tax rate of 21%.

– Pass-through income will be taxed at lower rates via a deduction. This is one area where the specific details matter.

– The corporate AMT is repealed.

– Net Operating Losses can only be carried forward, not backward (limited to 80% of taxable income).

– The individual mandate penalty is repealed, but for 2019 (not 2018). There’s still a penalty, but it’s $0.

– The Mayo decision (allowing the deduction of business expenses for professional gamblers who have losing years) is repealed for tax years 2018 – 2025. There are no other provisions that directly impact gambling in this legislation.

After I read the 1,097 pages (503 pages of legislation and about 500 pages of analysis) I will have more on the legislation.

2018 Standard Mileage Rates Released

December 14th, 2017

The IRS today announced the standard mileage rates for 2018:

  • $0.545/mile for business miles driven (up from $0.535/mile in 2015);
  • $0.18/mile for medical or moving purposes (up from $0.17/mile in 2015); and
  • $0.14/mile in service of a charitable organization (unchanged; set by statute).

You can either use this standard mileage rate or use actual expenses. Either way, it’s important to keep a mileage log!

Are Cryptocurrency (Bitcoin) Transactions Always Short-Term?

December 9th, 2017

One of my clients sent me a link to a tweet (on Twitter) from Peter Brandt:

Mr. Brandt is apparently an accomplished author and writes a trading newsletter. I strongly suggest to him he stick to that, and avoid giving tax advice (perhaps excluding, “You should consult your own tax advisor”) because he’s wrong.

Whether a capital transaction is long-term or short-term is determined strictly by the holding period. This is noted in the Tax Code, 26 U.S.C. § 1222. Here are the first four paragraphs of 26 U.S.C. § 1222:

For purposes of this subtitle—
(1) Short-term capital gain
The term “short-term capital gain” means gain from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(2) Short-term capital loss
The term “short-term capital loss” means loss from the sale or exchange of a capital asset held for not more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

(3) Long-term capital gain
The term “long-term capital gain” means gain from the sale or exchange of a capital asset held for more than 1 year, if and to the extent such gain is taken into account in computing gross income.

(4) Long-term capital loss
The term “long-term capital loss” means loss from the sale or exchange of a capital asset held for more than 1 year, if and to the extent that such loss is taken into account in computing taxable income.

This is law; the IRS cannot make an exception that all cryptocurrency transactions are short-term. Whether any capital transaction is long-term or short-term is determined strictly by the holding time. It doesn’t matter if it’s a stock, bond, real estate, cryptocurrency, or any other type of property.

Thus, whether a sale of cryptocurrency is long-term or short-term is determined solely by the holding time. If you hold Bitcoin for more than one year (the sale date is at least a year and a day after the date of purchase) the transaction will be long-term.

Nominations Due for 2017 Tax Offender of the Year

December 6th, 2017

In a little less than a month it will be time to reveal this year’s winner of the prestigious “Tax Offender of the Year” award. Remember, To be considered for the Tax Offender of the Year award, the individual (or organization) must do more than cheat on his or her taxes. It has to be special; it really needs to be a Bozo-like action or actions. Here are the past lucky recipients:

2016: Judge Diane Kroupa
2015: Kenneth Harycki
2014: Mauricio Warner
2013: U.S. Department of Justice
2012: Steven Martinez
2011: United States Congress
2010: Tony and Micaela Dutson
2009: Mark Anderson
2008: Robert Beale
2007: Gene Haas
2005: Sharon Lee Caulder

IRS Interest Rates Unchanged for First Quarter of 2018

December 6th, 2017

The IRS announced that interest rates for the first quarter of 2018 remain unchanged:

The rates will be:

• four (4) percent for overpayments [three (3) percent in the case of a corporation];
• 1 and one-half (1.5) percent for the portion of a corporate overpayment exceeding $10,000;
• four (4) percent for underpayments; and
• six (6) percent for large corporate underpayments.

The IRS notice is published in Revenue Ruling 2017-25.

What Portion of the Stipulation Didn’t You Read?

December 5th, 2017

A company owes withholding tax to the IRS. The case goes to Tax Court, where the issues are resolved, including a stipulated amount of withholding. Somehow the IRS forgets about the withholding. It then goes to a collection Appeals, where the withholding mysteriously gets ignored. The case comes back to Tax Court when the IRS issues a levy. The Tax Court remands the case back to Appeals; however, $70,000 of the withholding still gets ignored.

The Tax Court originally looked at this case in 2008.

On April 28, 2008, petitioner timely filed a petition with the Court relating to the notice of determination of worker classification. W. Mgmt., Inc. v. Commissioner, T.C. Dkt. No. 9745-08 (filed Apr. 28, 2008). The Court, on June 11, 2009, filed two stipulations of settled issues in which the parties resolved the issues raised in the notice of determination of worker classification and agreed that respondent would credit $195,708 to petitioner’s 1995, 1996, 1997, 1998, and 1999 income tax withholding…Shortly thereafter, petitioner appealed the Tax Court’s decision to the U.S. Court of Appeals for the Ninth Circuit, and respondent assessed the taxes and additions to tax reflected in the decision. Respondent did not, however, take into account the $195,708 of stipulated income tax withholding.

So that’s the first error: The original stipulation of withholding didn’t make it into the record. Unsurprisingly, the company asked for a collection due process (CDP) hearing noting that the IRS forgot about the stipulated withholding credits.

Meanwhile, the company lost the appeal to the Ninth Circuit. But,

In its opinion the court recounted respondent’s assurance that “any credits due to * * * [petitioner] will be administratively applied to * * * [its] tax accounts after the [Tax Court’s] [d]ecision becomes final.”

Somehow during the CDP hearing the Appeals Officer didn’t consider the stipulated withholding credits. That’s the second error: Somehow the Appeals Officer didn’t read the record of the Tax Court. The company went back to Tax Court, asking that the credits be put into the record.

The Court, on October 1, 2014, remanded petitioner’s case to allow an Appeals officer’s consideration of “any credits, specifically credits for income tax withholding, to which [p]etitioner may be entitled.” Steve Lerner, the Appeals officer assigned to the remand, determined that petitioner was entitled to $195,708 of credits but applied only $125,084 to petitioner’s accounts. On April 16, 2015, Appeals Officer Lerner issued petitioner a supplemental notice of determination that again sustained the levy notice.

And we have the third error. The company (rightly) wanted the missing $70,624 applied, so back to Tax Court we go. And IRS Appeals gets (again, rightly) a black eye:

On remand Appeals Officer Lerner agreed petitioner was entitled to $195,708 of income tax withholding but inexplicably credited petitioner only $125,084. By not taking into account $70,624 (i.e., $195,708 less $125,084) of stipulated credits, he reneged on respondent’s assurances to the Court of Appeals; failed to consider relevant issues relating to the unpaid tax; inappropriately balanced respondent’s need for the efficient collection of taxes with petitioner’s concern regarding the levy’s intrusiveness; and contravened applicable law and administrative procedure (i.e., section 3402(d) and Internal Revenue Manual pt. 4.23.8.4.3 (Dec. 11, 2013)) requiring respondent to abate an employer’s employment tax liability to the extent it is paid by an employee…The administrative record belies respondent’s contention that Appeals Officer Lerner applied all of the stipulated credits to petitioner’s accounts. Because his determination lacked a sound basis in law and fact, Appeals Officer Lerner abused his discretion.

Yikes! As the Court noted, this is a case that should have been resolved on remand. Or could have been resolved the first time at Appeals. And should have been resolved way back in 2009. Consider that the company had to pay counsel for representation in a case which should never have needed to be filed. I hope the company asks the IRS to pay for their legal fees, and perhaps the IRS will pay up without the need for another trip to Tax Court. This is definitely a case where the company prevailed and the IRS’s position was completely unjustified.

Case: Credex, Inc. v. Commissioner, T.C. Memo 2017-241

IRS Mostly Wins Coinbase Summons Fight

November 29th, 2017

The IRS has been battling Coinbase, the United States’ largest cryptocurrency exchange, in a fight to obtain information about individuals who sold Bitcoins during 2013, 2014, and 2015. The IRS issued a summons to Coinbase–basically, an administrative demand for information. Coinbase didn’t respond, so the IRS filed a lawsuit in an attempt to force Coinbase to comply. After the summons was narrowed to just individuals who bought, sold, sent, or received at least $20,000 worth of Bitcoin during those years (but not individuals who only bought and held or who were issued a Form 1099-K), Coinbase still refused to comply. Yesterday, a federal court in San Francisco ruled that Coinbase must (for the most part) comply.

That the IRS won isn’t a surprise. The IRS demonstrated that only 802 returns were filed in 2015 which claimed Bitcoin sales; I prepared 40 such returns so I prepared 5% of all returns that included Bitcoin sales in 2015! The IRS demonstrated there was noncompliance, and they further showed that the Coinbase records would help with tax administration. As for Coinbase’s arguments:

Coinbase argues that the Government committed an abuse of process because it seeks to enforce “a summons that lacks a proper investigative purpose” and “the production of a vast array of documents relating to 14,000 accounts, without any proper foundation.” The Court, however, finds that the Government has met its burden of showing that the Narrowed Summons serves the legitimate investigative purpose of enforcing the tax laws against those who profit from trading in virtual currency. And the information the Court has ordered produced is relevant and no more than necessary to serve that purpose. Coinbase’s novel insistence that it has met its burden to show abuse of process by virtue of the Government having narrowed its summons is unpersuasive. No court has even suggested such a rule, and this Court declines to be the first.

As for the order itself:

Coinbase is ORDERED to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period: (1) the taxpayer ID number, (2) name, (3) birth date, (3 [sic]) address, (4) records of account activity including transaction logs…, and (5) all periodic statements of account or invoices (or the equivalent).

The IRS asked for records on “Know Your Customer” diligence, agreements regarding third-party access, and correspondence between Coinbase and third party users related to the opening and closing of accounts. The court denied the IRS’s request for those records. The Court explained both the IRS’s reasoning and why that portion of the summons was denied:

At oral argument the Government explained that it included such broad swaths of records in its summons so that it will not need to return to court to ask for them if and when needed. The Court is unpersuaded. Especially where, as here, the Government seeks records for thousands of account holders through a John Doe summons, the courts must ensure that the Government is not collecting thousands and thousands of personal records unnecessarily. Moreover, if the Government later determines that it needs more detailed records on a taxpayer, it can issue the summons directly to the taxpayer or to Coinbase with notice to a named user — a process preferable to a John Doe summons.

Coinbase can appeal this ruling, but they would appear to me to have a very difficult case. The IRS has demonstrated the need, and the law is on their side.

This is not going to be the last effort by the IRS, either. There are other US-based exchanges, and the IRS will likely be calling on them. Additionally, I expect Congress eventually to mandate reporting of cryptocurrency transactions (or the IRS to issue regulations attempting to require such reporting). If you’re an American who used Coinbase and left out some cryptocurrency sales, now is a good time to amend your tax returns.

Law 1, Seattle 0

November 28th, 2017

Earlier this year the city of Seattle unanimously passed a city income tax into law. The tax would be 2.25% on total income above $250,000 for individuals and on total income of $500,000 for married filing jointly. The law was immediately challenged (it faced at least 11 different lawsuits) because the Washington constitution prohibits taxes on net income (and many other reasons, including a law passed in 1984 banning cities, counties, and other jurisdictions from levying income taxes). But the far-left city council in the Emerald City didn’t care about those pesky laws; they wanted, “…to build a more just and equitable society for all…” and that required (in their view) “…a serious overhaul of our state’s tax structure.”

In a development that was anything but a surprise, Judge John Ruhl ruled that the ordinance violates the law passed in 1984 that bars a tax on net income.

Regardless of which of these definitions one uses, the conclusion is the same: the City’s income tax is a tax on net income…

The City’s argument is not persuasive. Although it is true that “net proceeds” is not synonymous with “net income,” a “total income” figure that includes “net proceeds” necessarily reflects the result of a netting process, and thus is “net income.”

In sum, the court concludes that the City’s Ordinance imposes a tax on net income.

The judge did not reach the constitutional arguments because the city’s proposed tax was not legal based on statutory grounds.

While the city vowed to appeal to the Washington Supreme Court
, if they really want to change Washington’s tax structure a better choice would be to convince the Washington legislature to do so.

“Hello, It Has Been Detected That You Are a Scammer….”

November 16th, 2017

After recovering from a bout with the flu I attended continuing education yesterday with the Nevada Society of Enrolled Agents. We had a presentation from a Special Agent with TIGTA (the Treasury Inspector General for Tax Administration). One of the most interesting things he mentioned was that TIGTA is now robocalling IRS scammers, preventing them from calling out. (They’re also conducting lots of investigations of these scammers and have had some successes. Unfortunately, this is a lot like killing weeds: You get rid of one and two more pop up.)

There’s at least one individual who created something where he has been calling IRS scammers; by flooding their phone lines it prevents them from calling out. I do need to warn you that if you do this yourself you may be violating the law. Luckily, there’s no problem with TIGTA making these robocalls to block the scammers.

Here’s a YouTube video from “Project Mayhem.” (There is some NSFW language.) The advice from Project Mayhem is correct: If you get one of these calls, hang up. If they claim to be from a reputable company (and it’s someone you’re doing business with), hang up, look up their phone number, and you call them. If it’s from the IRS and you think you owe money to the IRS, check with your tax professional or call the IRS up yourself (800-829-1040).

GOP Tax Proposal Targets Professional Gamblers’ Losing Years

November 2nd, 2017

The Joint Committee on Taxation released its new tax proposal, H.R. 1, today. Buried within it is Section 1305:

SEC. 1305. LIMITATION ON WAGERING LOSSES.
(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: ‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering trans action.’’.

So what does this mean? The Joint Committee on Taxation (JCT) sent out an analysis:

Sec. 1305. Limitation on wagering losses.

Current law: Under current law, a taxpayer may claim an itemized deduction for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings.

Provision: Under the provision, all deductions for expenses incurred in carrying out wagering transactions (not just gambling losses) would be limited to the extent of wagering winnings. The provision would be effective for tax years beginning after 2017.

JCT estimate: According to JCT, the provision would increase revenues by $0.1 billion over 2018-2027.

The JCT analysis is wrong about the current law. Only professional gamblers can take business expenses beyond their gambling winnings to create an overall loss. This is the result of Mayo v Commissioner; Section 1305 would overrule the Mayo decision.

I will have more on this proposal, most likely over the weekend. There’s quite a bit for me to digest. For now, let me state that my first reading of the measure did not leave me feeling good about it.