April 2012 saw a dramatic decline in any meaningful discussion of fundamental tax reform. Congress was nevertheless active in attempting to enact incremental tax law changes. First up were efforts to curtail various tax breaks now enjoyed by the oil industry. Next on the Congressional agenda was consideration of Representative Eric Cantor's (R-VA) "Small Business Tax Cut Act,"
discussed in last month's Newsletter. This legislation would give certain small businesses a tax deduction of up to 20% of the business' active income. The Senate's Democrats countered with their own small business tax cut bill, the "Small Business Jobs and Tax Relief Act of 2012."
And, Democrats in the Senate are trying to advance President Obama's "Buffett Rule" through the "Paying A Fair Share Act"
These efforts and other tax news are discussed below:
Senate Democrats Propose Their Own Small Business Tax Cut Bill
– On March 26, 2012, Senate Majority Leader Harry Reid (D-NV) introduced in the Senate the "Small Business Jobs and Tax Relief Act of 2012" as a Bill intended to compete with the "Small Business Tax Cut Act" introduced in the House in March 2012 by House Majority Leader Eric Cantor (R-VA). The Bill introduced by Sen. Reid would create a tax credit for new payroll added in 2012 through hiring or by increasing wages. The credit would equal 10% of the excess of wages and compensation paid during 2012 over what was paid in 2011 (subject to a tax credit cap of $500,000). The Act would also generally extend the 100% bonus first year depreciation deduction to apply to qualifying new property bought and placed in service before 2013. On April 18, 2012, the House voted 235-173 in favor of the "Small Business Tax Cut Act" which would permit every "small business" the ability to deduct 20% of their active business income, subject to certain limitations. Upon being informed of the House's passage of the Act, Sen. Reid called the Act "laughable" and said the Senate would instead be taking up its own "Small Business Jobs and Tax Relief Act of 2012" in the coming months.
New Medicare Tax Still Due for 2013
– Commencing with taxpayers' 2013 Tax Year, a new 3.8% Medicare Tax will be imposed on the lesser of (i) "net investment income," or (ii) the excess of modified adjusted gross income over a threshold amount ($250,000 for married taxpayers, $125,000 for married taxpayers filing separately, and $200,000 for all others). Although the term "net investment income" is defined in the Internal Revenue Code, in some respects it is poorly defined. On March 28, 2012, Michala Irons, IRS Office of Chief Counsel, stated that the IRS intends to release very soon proposed regulations on exactly what is meant by the term "net investment income."
Senate Republicans Introduce a Bill to Permanently Repeal the Federal Estate Tax
– On March 28, 2012, Senator John Thune (R-SD) and 20 other Republican Senators introduced the "Death Tax Repeal Permanency Act (S. 2242). A similar bill (H.R. 1259) had been introduced by Representative Kevin Brady (R-TX) in the House of Representatives in 2011, but has languished there ever since. If something is not done by January 1, 2013, the current Federal Estate Tax law will not only continue in effect but will also revert to the lower exemption amounts that were in effect in 2008. In a prepared statement, Sen. Thune remarked that "The federal government has no place being in the business of forcing grieving families to pay a tax on their loved one's life savings that has been built from income already taxes when originally earned."
ABA Tax Section Urges Congress to Ease IRS Barriers Facing Tax Fraud Victims
– In a letter dated April 2, 2012, the ABA's Tax Section highlighted its concerns for taxpayers who have become victims of identity fraud by noting:
TaxMasters Hit With $195 Million Verdict
- Victims of tax fraud resulting from identity theft are often left frustrated by the IRS's insistence on preserving the privacy rights of those committing the fraud.
- The IRS wastes its limited resources trying to carefully determine which information it is allowed to disclose to victims of identity fraud, but the net effect is that the information that is withheld is exactly what is needed to stop identity thieves.
- The letter went on to recommend the creation of a mechanism which would allow certain disclosures of tax return and tax account information to taxpayers who are or who may be subject to the misuse of their taxpayer identification number by identity thieves.
– On March 30, 2012, a jury in the case styled Texas v. TaxMasters, Inc., et al. assessed a verdict of $195 million against a Houston-based tax resolution company, TaxMasters, and its founder, Patrick Cox, on the grounds that the company and Mr. Cox misled and defrauded its clients. Specifically, the jury ruled that:
IRS Set to Launch a Second Wave of Investigations of Offshore Banks
- TaxMasters misled its clients through aggressive TV advertisements that falsely claimed the company could work with the IRS to postpone or stop wage garnishments or levies and liens on property.
- TaxMasters failed to disclose to its clients that it had a no-refund policy and did not start work on cases until the client had paid in full the fee charged by TaxMasters, even if it missed significant IRS deadlines as a result of such delay.
– In a speech given to the National Press Club on April 5, 2012, Internal Revenue Commissioner, Douglas Shulman stated that the IRS is launching a second wave of investigations of banks, bankers, intermediaries, and taxpayers as it continues to gather information on offshore assets through its voluntary disclosure program. The IRS has already collected more than $4.4 billion through its Offshore Voluntary Disclosure Initiative which allows taxpayers to voluntarily report to the IRS their overseas assets and any income derived therefrom in exchange for reduced tax penalties and the avoidance of criminal prosecution. In the words of Mr. Shulman, "We have fundamentally changed the risk calculus of taxpayers who are thinking about hiding their money overseas, and we are well on our way to deterring the next generation of taxpayers from using hidden bank account to cheat on their taxes."
Increases in the Number of Offer In Compromise Filings Is Creating Taxpayer Delays
– On April 12, 2012, the Treasury Inspector General for Tax Administration announced that an increase in requests for "Offers in Compromise" (via the filing of IRS Form 656) has created inventory backlogs and delayed responses to taxpayers. According to the Inspector General, the combined impact of a weak economy and IRS efforts to promote the OIC program has increased the number of requested offers by 28% between 2007 and 2011, while the resources to work the offers has decreased.
Buffett Rule Bill Fails to Pass First Cut
– On a vote in the Senate taken on April 16, 2012, Senate Majority Leader, Harry Reid (D-NV) came up 9 votes short of the needed 60 votes to limit debate on S. 2230, the bill sponsored by Senator Sheldon Whitehouse (D-RI) to enact into law the so-called "Buffett Rule." S. 2230 would have imposed a phased-in 30% income tax on taxpayers' annual income in excess of $1 million. As a result of the vote, it is less likely that the Senate Democrats will be able to move the bill to a final vote by the full Senate this year.
Balanced Treatment of Corporate Debt vs. Equity Financing May Be Ahead
– On April 17, 2012. Representative Kevin Brady (R-TX) stated at a meeting of the Joint Economic Committee that ending the Internal Revenue Code's bias in favor of debt financing over equity financing is becoming a rising priority for Republicans considering fundamental income tax reform of the corporate income tax code. According to Kevin Hassett, also speaking to the Committee, because companies can deduct interest payments associated with debt financing, but cannot deduct dividend payments associated with equity financing, the tax code encourages companies to use debt financing, but when these companies carry large debt loads, they are much more likely to enter bankruptcy during difficult times.
The Idea of a National Retail Sales Tax Just Will Not Go Away
– On April 17, 2012, Republican lawmakers again pushed for Congressional action on the Fair Tax Act of 2011 (H.R. 25, S. 13). The Fair Tax Act of 2011 would institute a national retail sales tax that would eliminate entirely the federal individual and corporate tax systems. The idea of a national retail sales tax has been around for many years, but the bill has gained more attention lately since it now has 67 co-sponsors in the House and 8 co-sponsors in the Senate, its highest number of supporters to date.