April 2011 Archives

April 27, 2011

Internet Sales Tax -- Coming Sooner Than You May Think

If something called the "Main Street Fairness Act" clears Congress, the days of sales tax-free Internet commerce may be numbered.

U.S. Senator Dick Durbin (D-Illinois) plans to introduce the bill, we hear, shortly after the Easter recess.

"Why should out-of-state companies that sell their products online have an unfair advantage over Main Street bricks-and-mortar businesses?" queried Durbin recently in a speech. "Out-of-state compaines that aren't paying their fair share of taxes are sticking Illinois residents and businesses with the tab."

But we hear that the Direct Marketing Association (DMA), not surprisingly, takes a dim view of Durbin's idea. "You're just giving the states a blank check to make changes without any congressional oversight," says Jerry Cerasale, DMA's senior vice president for government affairs. "We oppose that.....We think that's abrogating the authority of Congress."

So far, nobody has been able to quite figure out just what to do with the Internet from a sales and use tax standpoint. (Check out Nolo's article Sales Tax and the Internet for more info.) And that's just the way the NetChoice Colalition likes it. The Coalition says, "Internet access -- and its concomitant ability to communicate, educate, and telework -- should not be taxed. At a time when most people agree that the U.S. needs more broadband, Internet access taxes will slow broadband deployment, particularly in rural and low-density areas. Fewer consumers will buy a higher-priced taxed product. A smaller pool of potential customers means providers can't justify investment in new broadband infrastructure build-out......NetChoice endorses a permanent tax moratorium to encourage continued innovation on the 'Net'."

The big boys of retailing, however, would likely support Durbin's proposal. Why wouldn't they -- their bricks-and-mortar presence is increasingly ubiquitous.

But as NetChoice points out, "The 'Internet' is not a specific place or thing, but a network of networks that transcend geographic and political borders." A virtual entity. And who's in charge of taxing that?

April 19, 2011

Stockbrokers to Start Reporting Clients' Tax Basis

Taxpayers will be receiving a little more assistance from their stock brokers when it comes to the preparation of the annual Schedule D in their tax returns -- the Energy Improvement and Extension Act of 2008 has mandated that every broker required to file a return with the IRS reporting sales proceeds must also report a customer's adjusted basis in the security, and whether any gain or loss on the sale is long or short term in nature.

A "covered security" is stock in a corporation acquired on or after January 1, 2011, or shares in a mutual fund, or shares acquired in a dividend reinvestment plan (DRP) acquired after January 1, 2012.

If a customer sells less than his or her entire position of a security in an account, a broker must report the customer's basis (other than mutual fund or DRP shares) generally using the first-in, first-out (FIFO) method unless the customer provides the broker an adequate and timely identification of the shares or units the customer wants to sell. A broker must report the adjusted basis of mutual fund or DRP stock (for which the customer may average the basis of the stock) in accordance with the broker's "default" method unless the customer notifies the broker that the customer elects a different permitted method.

The new rules change the way taxpayers determine the average basis of mutual fund stock and permit them to average stock held in a DRP. Starting in 2012, taxpayers who elect to average the basis of mutual fund shares will compute separate averages for fund shares held in different accounts. Taxpayers will also be permitted to average the basis of mutual fund shares in one account but not average them in another account.

The due date for brokers to so report will be February 15 after the end of the tax year in question. And when a taxpayer changes brokers, the rules will require the transferring broker to furnish to the receiving broker a written statement with all necessary information required for the receiving broker to comply with the Act's basis reporting requirements. Statements required by this rule are generally due no later than 15 days following the transfer of the covered securities.

Won't all the brokers just love this new burden upon them!

For more of the gory details, check out the IRS' 68 "frequently asked questions" at http://www.irs.gov/taxpros/article/0,,id=237099,00.html.

April 13, 2011

Tax Dodgers and Whistleblower Ethics

A curious section of the Internal Revenue Code allows the IRS to pay money to people who blow the whistle on persons who fail to pay taxes owed. Particularly curious when the whistleblower may be the tax dodger's own accountant!

The amount of the reward is determined by the IRS' "Whistleblower Office," and depends on the extent to which the whistleblower "substantially contributed" to the administrative or judicial action the IRS brings based on the information. All relevant factors, including the value of the information furnished in relation to the facts developed by an investigation of the violation are taken into account in determining the amount of the reward.

Section 7623 allows the Secretary to pay an "informant award" of at least 15 percent, but not more than 30 percent of the amount collected if the taxes, penalties, interest and other amounts in dispute exceed $2 million. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court.

There is also an award program for other whistleblowers -- generally those who do not meet the dollar thresholds mentioned above. Awards in the smaller cases are discretionary and the informant cannot dispute the outcome of the claim in Tax Court.

Recently, the IRS paid $4.5 million to an accountant who "blew the whistle" on his employer, and found something like $20 million for the government. Sounds like a "win-win," but the notion of Uncle Sam encouraging advisors to turn in their employers and clients is unsettling to say the least. Most of us consider our first obligation to provide honest, reputable advocacy to all of our good and valued clients, and not to function as government cops, policing the collection of revenue.

But if you're so inclined, consider IRS Form 211: Application for Award for Original Information.

April 6, 2011

State Tax Withholding Simplification Coming?

We hope so -- it would be a good thing indeed.

We hear that the Executive Committee of the Multistate Tax Commission (MTC) has approved a model law which would establish a uniform standard for the manner in which states tax compensation earned by nonresidents.

Under the model, compensation earned by a nonresident in a state would be exempt from taxation in that state if:

  1. The nonresident has no other taxable income from sources within the state for the tax year in which the compensation was received;
  2. The nonresident is present in the state to perform employment duties for no more than 20 days during the tax year in which the compensation was received; and
  3. The nonresident's state of residence provides a substantially similar exclusion or does not impose any individual tax.

The rules would not apply to professional athletes, professional entertainers, prominent folks who perform services for compensation on a per-event basis, construction workers, and certain "key employees."

A good step forward -- folks who earn income in multiple jurisdictions (like some independent contractors and consultants) have long been burdened with multiple state (and sometimes even local) tax return filing and payment obligations -- often a compliance nightmare!