Archive for October, 2013|Monthly archive page

Happy 100th Birthday Federal Income Tax?!

Originally published in the Cedar Street Times

October 18, 2013

On October 3rd, our nation’s federal income tax turned 100 years old.  Usually lots of people show up for anyone turning 100, but sadly, for the federal income tax, there was no grand party.  In fact, most of its closest friends – the 106,000 employees of the Internal Revenue Service were at home due to the government shutdown!  Americans celebrating the federal income tax would be lackluster at best – maybe on par with the excitement of throwing a party for your boss.  But let us at least pay some tribute to this system and perhaps gain a little more perspective

The roots of the income tax go deeper than 1913.  Abraham Lincoln set up the first income tax in 1862 in order to finance the Union efforts in the Civil War, and he established a position called “Commissioner of Internal Revenue” to handle this job.  The tax was a temporary tax and expired in 1872.  It provided about 21 percent of the cost of the war efforts, and about 10 percent of Union households were touched by the income tax.

Tariffs and excise taxes were the typical means of generating most revenue before and after the Civil War, but the country was looking for a better system.  In 1894, Congress tried to reenact the income tax but it was shot down by the Supreme Court which declared it unconstitutional.  The Constitution basically said that direct taxes had to be apportioned to the states based on relative population.  An income tax clearly violated that since it was not divided out based on population but different to each person based on each individual’s income.

During the early 1900s, there was a growing movement by the people in support of a permanent income tax that would mainly be levied on wealthy individuals.  Tariffs and excise taxes hit low and middle income people squarely on the shoulders since a much higher percentage of their total income was taxed as a result.  The only way to have an income tax, however, was by laying the groundwork to make it constitutional via an amendment.

Three main campaign issues defined the election of 1912: monopolies, women’s suffrage, and tariffs.  Woodrow Wilson wanted to break up monopolies, he dodged women’s suffrage by saying it should be decided at the state level, and he wanted revenue reform.  He was elected with nearly 82 percent of the Electoral College vote and the next year the 16th amendment was ratified which states, “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

I have a facsimile on my office wall of the first income tax return in 1913.  It was three pages long with one page of instructions (2012 instructions were 214 pages by comparison).  Adjusted for inflation in today’s dollars, if you made less than $70,000 as a single individual, you had no income tax liability.  If you made between 70,000 and $465,000, you were assessed a one percent income tax!  The top bracket was only seven percent, and assessed to those filers making over $11.6 million in today’s dollars.

Compare that to 2013…our bottom tax bracket is 10 percent assessed on single individuals making between $10,000 and $18,925, and our top bracket is 39.6 percent assessed on individuals making over $400,000.  In fairness to history, after the first three years tax rates started rising and they skyrocketed during World War I when the top bracket hit 77 percent on earnings over $15 million in today’s dollars.

Since 1975, there have been dozens of court cases from crafty people trying to figure out how they can get out paying income taxes.  The cases involve everything from claims that ratification procedures of the sixteenth amendment in certain states were not properly followed right down to claims that differences in punctuation and capitalization marks in versions ratified by the various states means the ratification was null and void. None of the ratification cases have ever been victorious and the courts have ruled ratification arguments are now frivolous or fraudulent.

The federal income tax is quite resilient, and has spent its entire life being pulled in many directions.   I am sure it will soon get over any hurt feelings from not having a 100th birthday party as did the Department of Labor, the U.S. Forest Service, and the National Archives.  Maybe on its 200th birthday it will get a cake.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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IRS Affected by Government Shutdown

Originally published in the Cedar Street Times

October 4, 2013

Due to the inability of Congress to come to terms regarding the government shutdown (or just about anything for that matter), I have a pretty good chance that this article will still be worth reading by the time it is published in the newspaper on Friday!

Everyone is aware by now that over 800,000 federal employees are on furlough. I read that this is more than all the employees of Target, General Motors, Exxon, and Google combined.  That is a lot of people!  Included in these 800,000 are most of the Internal Revenue Service employees.

Many of you may be cheering right now, but certainly not anyone that is waiting on a refund or currently trying to work out any problems with the IRS.  Prior to the furlough, telephone wait times to speak with an IRS agent have been 15 – 45 minutes, or sometimes you would get the message that they were too busy to even put you on hold, and then hang up on you.  Right now you will have an indefinite wait since the call centers are completely closed.  All local IRS offices are also closed to the public as well.  The shutdown will of course put even more pressure on wait times when funding is restored, and there is a backlog of problems to resolve.

This is an interesting time to be shutdown considering that extended personal tax returns are due on October 15.  The IRS still expects individuals and businesses to file all tax returns on time, keep making income and payroll tax payments, etc.  Presumably, they have some essential employees still on-the-clock to let the mailman in and to make deposits!  They are encouraging electronic filing since those returns are processed automatically by computers.  Paper returns will not be processed, however any payments enclosed will still be processed!  All tax refunds are suspended until normal operations resume.

Computer generated IRS notices will continue to be mailed out, but all audits, appeals, and taxpayer advocate cases are suspended.  If you had meetings scheduled they will be rescheduled.

The IRS website will still be up and running, but certain services may be unavailable.  The IRS automated telephone system will also still be working (800) 829-1040.

I can only assume that penalties and interest will still accrue even if you are waiting on the IRS to resolve an issue.

I called the IRS employee emergency hotline for kicks.  They are informing employees that they cannot perform any work, even if they want to volunteer their time to keep certain cases moving, and they cannot use any government computers, equipment, or other resources.  If they were en route traveling when the furlough began, they were to immediately return home.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Health Reform Notice to Employees by Sept. 30

Originally published in the Cedar Street Times

September 20, 2013

Change is challenging, and the current health reform laws are no exception.  And it is exceptionally challenging when the laws are constantly changing, vague, impossible to follow, or impossible to enforce!  In light of that commentary, I would like to enlighten business owners that they are supposed to notify employees of health care coverage options and the Health Insurance Marketplace by September 30th, even if they do not have or intend to provide health insurance.

The United States Department of Labor website contains two model notices that you can easily adapt and provide to your employees.  One of the notices is designed for employers that have a health insurance plan.  The other notice is designed for employers that do not have a health insurance plan and do not intend to provide health insurance.

If you go to http://www.dol.gov/ebsa/healthreform/ and look in the section titled “Notice to Employees of Coverage Options,” you will see the two notices and can even download the one you need as an editable Microsoft Word Document.  You can then fill out the section that provides contact information for the person in your company that can handle questions.  If you pick the notice for employers that have health insurance, then there is also a section to fill out about your health insurance plan.  Then you simply give them to your employees.

The notices essentially make people aware that the new law requires people, in most circumstances, to carry health insurance starting January 1, 2014, with an open enrollment period beginning October 1, 2013.  It also makes them aware they should be able to purchase health insurance through a Health Insurance Marketplace if their employers do not offer affordable coverage that meet certain standards.  The notices also try to explain there could be some tax benefits to assist with paying premiums depending on income levels.

It would be nearly impossible to enforce and unfair to penalize for noncompliance regarding this notice to employees given the mess the country is in trying to implement the Affordable Care Act.  Fortunately, the government recognizes this as well, and is saying they will not penalize businesses for failure to notice, even though the businesses should provide notification.

For people that fail to obtain health insurance, a self-imposed penalty is supposed to be reported on your 2014 tax return equal to the greater of two calculations.  The first calculation is one percent of the difference between your Adjusted Gross Income (AGI) and the minimum AGI required to file your tax return.  The second calculation is $95 for yourself and each of your dependents ($47.50 per person under 18) up to a maximum of $285.  Most people will therefore be looking at the one percent penalty.  In order to enforce this law, the IRS will be looking for statements from employers reporting details of employee coverages in company plans.  This reporting will be voluntary for 2014, which means many businesses will not report, and it will be very difficult for the IRS to enforce the penalty short of discovering it through an audit process.  In 2015 and 2016, the penalty is expected to rise substantially.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.