Congress Gets Closer to a Deal on Payroll Tax Cut

Congressional leaders in both parties signaled they were working on a deal to extend the payroll tax cut and unemployment benefits for at least two months, while also agreeing on a spending bill that would avert a government shutdown.

Lawmakers worked into and gave encouraging signs that the partisan bickering may be cooling down at last as voters grow increasingly impatient with the gridlock that has characterized Capitol Hill this past year.

Negotiators have agreed on a $1 trillion spending bill to fund government operations through next fall, so the threat of a government shutdown won’t be looming until after the elections.

However, a deal on the payroll tax cut remained unsettled yet, especially how to pay for the cost of extending this year’s 2 percentage point cut in Social Security and Medicare withholding taxes from 6.2 to 4.2 percent beyond December 31. Lawmakers also need to agree on how to pay for extending federal emergency unemployment insurance benefits, and the “doc fix” that would keep Medicare reimbursements to physicians from plummeting 27 percent.

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Gingrich Plan Would Lower Taxes $1.3 Trillion

The tax plan advanced by Republican presidential candidate Newt Gingrich would have the effect of adding over $1 trillion to the federal deficit in a single year and give the overwhelming share of tax benefits to those at the upper end of the income scale.

A new analysis of Gingrich’s plan, published by the Tax Policy Center, found that the top 0.1 percent of taxpayers, those making over $8 million a year, would get an average tax cut of $1.9 million under the plan by 2015. Low-income households, in contrast, would get an average tax cut of $63.

Under Gingrich’s plan, all taxpayers would have a choice between paying taxes under the current Tax Code or under an alternative system based on a 15 percent flat tax. Capital gains, dividends and interest income would not be taxed.

Taxpayers would be able to claim a standard exemption amount of $12,000 for each individual and dependent. The Gingrich plan would also eliminate the standard deduction and most itemized deductions and credits, but would preserve deductions for mortgage interest and charitable contributions along with the Child Tax Credit and Earned Income Tax Credit.  Gingrich’s plan would also repeal the alternative minimum tax.

In terms of business taxes, the plan from the former Speaker of the House would reduce the corporate income tax rate from 35 to 12.5 percent, and permit full expensing of capital expenditures aside from residential rental housing and inventories.

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House Passes GOP Payroll Tax Cut Extension Bill

 

House Republicans have passed an extension of the payroll tax cut for another year, but Senate Democrats have vowed to defeat the bill when it comes up for a vote Wednesday 12/14/2011.

The House voted 234-193 to approve the bill Tuesday evening, with 10 Democrats joining Republicans in voting for the bill. It would pay for the cost of extending this year’s 2 percentage point cut in Social Security and Medicare withholding taxes mainly through an extension of the current pay freeze for federal employees, reductions in the federal workforce, decreased subsidies for setting up health care insurance exchanges, and a gradual ratcheting down of the maximum number of weeks of unemployment benefits that could be claimed from 99 to 59.

The bill, known as the Middle Class Tax Relief & Job Creation Act, would gradually increase Medicare premiums for high-income retirees, change the co-pay structure for civilian federal retirees, auction off wireless spectrum, and extend 100 bonus depreciation for investments in new equipment. It would also fund the “doc fix” to prevent steep reductions in Medicare reimbursements for physicians. It also includes provisions to accelerate approval of the controversial Keystone XL oil pipeline from Canada to the U.S., and block a rule from the Environmental Protection Agency on industrial boilers and incinerators from taking effect.

Democrats and the Obama administration favor paying for the cost of extending the payroll tax cut and unemployment benefits by levying a 3.25 percent surtax on income over $1 million, but Republicans have repeatedly opposed any tax increases.

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IRS to Use SAS Analytics to Combat Fraud

The Internal Revenue Service has signed a $6.25 million contract with the SAS Institute to use the company’s analytical software to help it identify tax evasion and fraud as part of the agency’s Return Review Program.

The RRP system is being deployed to help the IRS reduce the estimated $345 billion tax gap between taxes owed and paid. The SAS Analytics software will help the IRS improve its fraud detection capabilities and uncover noncompliance at the time a tax return is initially filed.

The IRS is planning to move toward a more real-time tax system in the years ahead that would automatically match electronically filed tax return data with information returns from third parties such as employers and banks. On Thursday, the service held the first of a series of meetings to solicit feedback from accounting and tax practitioner organizations.

SAS’s analytical software will score tax returns using a combination of business rules, anomaly detection, predictive modeling and social network analysis. Users at the IRS will be able to set up business rules that detect possible fraud and alert investigators and auditors to suspicious-looking returns.

SAS’s software is also used by other government agencies to detect Medicare and Medicaid fraud, purchase-card fraud, bid-rigging and terrorist financing.

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Tax Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.

The IRS is aware that some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so.  Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law.  This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.

Note that penalties will not be imposed in all cases.  As discussed in more detail below, taxpayers who owe no U.S. tax (e.g., due to the application of the foreign earned income exclusion or foreign tax credits) will owe no failure to file or failure to pay penalties.  In addition, no FBAR penalty applies in the case of a violation that the IRS determines was due to reasonable cause. 

This fact sheet is provided for information purposes only, and the topics discussed may or may not apply to a particular taxpayer’s situation.  The IRS continues to consider the topics discussed in this fact sheet and will provide additional information as it becomes available

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IRS Announces 2012 Standard Mileage Rates, Most Rates Are the Same as in July

Issue Number:    IR-2011-116

The Internal Revenue Service today issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

  • 55.5 cents per mile for business miles driven
  • 23 cents per mile driven for medical or moving purposes
  • 14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51.

Notice 2012-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

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Congress Considers Tax Reform of Financial Products

The Senate and the House’s tax-writing committees held a rare joint hearing on reforming the tax treatment of financial products such as derivatives.

During the joint hearing between the Senate Finance Committee and the House Ways and Means Committee, members looked at how sophisticated financial instruments such as variable prepaid forward contracts and swaptions were being used to help shield assets from taxes.

However, they also talked about how increasing taxes on financial products could affect not only wealthy investors, but also increasingly popular investment vehicles such as exchange-traded funds. The Joint Committee on Taxation staff prepared a report on issues related to the taxation of financial instruments and products, and how investors often chose particular financial products based on their tax advantages.

Panelists and lawmakers noted that by trying to close tax loopholes in one type of financial instruments, investors and their tax advisors would only be driven to resort to another investment strategy or derivative where they save on taxes.

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IRS Needs to Do Better Audits of Small Corporations

The Internal Revenue Service has been doing a better job of auditing small corporations in recent years, according to a new government report, but potential quality concerns remain.

The report, from the Treasury Inspector General for Tax Administration, reviewed whether IRS examiners followed the appropriate procedures and guidelines when they audited the tax returns of small corporations with assets of less than $10 million.

Many corporations in the United States are considered closely held because they are owned by one shareholder or a closely knit group of shareholders. These shareholders typically exercise significant control over managing and directing the day-to-day operations of the corporation, providing them with opportunities to improperly structure transactions that reduce the amount of income taxes owed by the small corporation or its shareholders.

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IRS Plans Public Meetings on ‘Real-Time Tax System

The Internal Revenue Service plans to host the first of a series of public meetings on its plans to create a “real-time tax system” that would provide immediate feedback on whether the information in a tax return matched the IRS’s records.

The futuristic tax system is one that IRS Commissioner Doug Shulman has been described during an appearance before the National Press Club in April.

With the new system, the IRS would move away from its traditional “look back” model of compliance, and instead perform substantially more “real time,” or upfront matching of tax returns when they are first filed with the IRS with the data in the information returns it has received from other sources. The goal is to improve the tax-filing process and improve overall tax compliance.

The IRS would be able to match the information submitted on a tax return with third-party information right up front during processing and provide the opportunity for taxpayers to fix the tax return before acceptance if it contains data that does not match IRS records.

At the public meetings, IRS officials will solicit feedback and input from outside stakeholders to provide comments and insight. The first meeting will feature representatives of consumer groups, the tax professional community, and government representatives.  A future public meeting will include, among others, representatives of the employer and payroll community, the software industry, financial institutions and additional government representatives. 

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IRS to Ease Tax Penalties for Americans in Canada

The Internal Revenue Service has reportedly backed away from plans to heavily penalize U.S. citizens and dual citizens living in Canada who may not have paid all of their taxes.

The plans to assess heavy penalties against taxpayers had been causing consternation north of the border. They stemmed from the Foreign Account Tax Compliance Act, or FATCA, which was included last year as part of the HIRE Act.

The law requires foreign financial institutions to report directly to the IRS information about the financial accounts held by U.S. taxpayers and the foreign entities in which U.S. taxpayers hold a substantial financial interest. U.S. citizens with bank accounts in other countries have long been required to file reports of foreign bank accounts, or FBARs. But the IRS has been stepping up its enforcement in recent years, particularly with Swiss banks, pressuring them to disclose information on their U.S. account holders.

The IRS has not yet officially issued any guidance, but is expected to soon produce a document laying out ways to reduce the burden on taxpayers, although the agency is limited to some degree because there has not been a change in the FATCA provisions by Congress.

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